ECO 135 Introduction to Economics I

Final Exam
Take Home

1. Identify that the following statements are true or false and explain your
reasoning in brief. (25 points)
a. Assuming well-defined indifference curves, when marginal utility is zero,
total utility is at a minimum.
False. Because in a good indifference curve, when marginal utility equals zero,
total utility reaches its maximum. And then it stops. Marginal utility decreases
as consumption increases. These two are in inverse relationship.
b. Anna tells you that she prefers A to B, B to C and C to A. This violates the
assumption of that “consumers are rational” when analysing consumer
preferences.
True. It is making choices based on preferences. In this sense, it is rational if a
consumer always chooses the most suitable alternative, he prefers the most. The
consumer has already sacrificed option A for option B. If it returns from C to A
again, it violates consumer logic.
c. Alfred is consuming X and Y so that he is spending his entire income and
MUx/Px = 8 and MUy/Py = 4. To maximize utility, he should consume more X
and less Y.
True. For product X, the benefit per dollar is greater. According to the utility-
maximizing rule: Mux/Px = Muy / Py equation must be satisfied. For this, the
consumer must increase his consumption of X, reduce his consumption of Y (as
the consumption of X increases, the MU of X decreases, and the two sides are
equal)
d. If the marginal product of labor is less than the average product of labor, then
the average product of labor is increasing.
False. If the marginal product is above average, the average rises; If the
marginal product is below average, the average falls. Average product = total
product / total units of labor. The addition to the total product represented by the
marginal product is falling and therefore the average product will also fall.
e. The franchiserʹs fee that a restaurant must pay to the national restaurant chain
is most likely a variable cost for a firm.
False. Because franchise cost is fixed, not variable. That is, a single fixed fee is
paid. Franchise cost is related to fixed production cost rather than variable
production cost.

2. Refer to figure below. Answer the following questions. (25 points)

a. What is the profit maximizing output of the firm? (5points)
P=MC=MR
Profit maximizing output is the point that P equals to MC, so that it is 12.
b. If this farmer maximizes profits, what will be his profits? (10 points)
Π =TR(q)-TC(q)
To find profit, we need to calculate TR and TC
TR= P x q
= 15 x 12
= 180
TC=ATC x q
=11 x 12
= 132
Π =TR(q)-TC(q)
= 180-132
=48
c. Which point is this farmerʹs shutdown point? Explain why. (10 points)
The shutdown point:
Marginal Cost (MC) = Average Variable Cost (AVC)
In other words, when we look at the graph, the point where the marginal cost is
equal to the average variable cost is point 6 bushels of wheat.
3. Suppose the firm’s cost function is C(q)= 4q2 + 16. (25 points)
a. Find variable cost, fixed cost, average cost, average variable cost, marginal
cost and average fixed cost.
Variable cost: 4 q2
Fixed cost: 16
4 q2 +16
Average cost: 16
variable cost
Average Variable Cost: q
= 4q

dC
Marginal cost: dq = 8q

¿ cost 16
Average Fixed cost: q
= q

b. Show the average cost, marginal cost, and average variable cos curves on a
graph.

c. If QD=100-2P and QS=50+3P, what is the short run profit maximizing level
of production at the market equilibrium price.
QD = 100-2P
QS = 50 + 3P
In equilibrium QS= QD 100-2P = 50 + 3P
P=10
P=MC=MR
MC= 8q
If P=MC
8q= 10
q= 1.25

d. According to your answer on part c, at the profit maximizing level of

production and the given market equilibrium price, calculate total profit or loss.
Π =TR(q)-TC(q)
= (10x 1.25) – (4 x 1.5*2+16) = -9.75 (negative profits)

e. Assuming that all identical firms in the industry produce profit maximizing
level of output, calculate the number of firms in the industry.
Market output: Q= n ×q
q: firm’s output
n: number of firm’s
thus,
80=n × 1.25
n= 80/1.25= 64
thus, 64 firms.

4. Discuss the impact of technological improvement on the competitive firm and

the competitive market in the long run. Use long run cost curves analysis and
market equilibrium analysis. (25 points)
I think technological advances stimulate competitive firms and the competitive
market. For example, the production of a new technological product affects the
market positively. The competitive environment increases. The number of
buyers and sellers is high in the perfect competition market. In these markets
where there are many buyers and sellers, the price is formed automatically
according to the supply and demand. So, it is impossible to talk about a specific
price. We can say that any Technological development will increase the price in
a competitive market, but as I have just said, we cannot talk about a specific
price. In a perfect competition market, buyers and sellers may not always be in
equal numbers. Markets, where there are many buyers and few sellers, are
called oligopoly markets. A technological development oligopoly increases the
price in the market. In monopoly markets where there are many companies
selling a differentiated good, the price may be slightly lower than the oligopoly
market. To discuss this situation in long-run cost curve analysis and market-firm
balance analysis, all factors will change in the long run. This causes the
operating companies to scale up. New companies will enter the market in the
long run. As a result of these developments, the total amount of demand does
not change, while the increase in the total amount of supply will decrease the
market prices. This will shake the market balance. Because market equilibrium
is in equilibrium when the quantity of supply and the quantity of demand are
equal.

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