BANK SOAL UAS MICROECONOMICS 2020 by @TUTORKU

CHAPTER 9 - THE ANALYSIS OF COMPETITIVE MARKETS

1. Please complete the table below:

Binding if Not Binding if

Price Ceiling (a).................. than price equilibrium (b)................. than price equilibrium

Price Floor (c).................. than price equilibrium (d)................. than price equilibrium

Price ceilings are primarily targeted to help (e)..................,

while price floors generally benefit (f)..................
No 2-3 information:
Suppose the government raises the price of cheese above the market equilibrium level (P0) by imposing a high
minimum price and purchasing all of the excess supply from the market, and these quantities are destroyed. Based on
the areas in the figure below,
2.What is the change in producer surplus after this policy
is adopted?
A) Producers lose area C but gain area A.
B) Producers lose area C but gain area A+B.
C) Producers gain A.
D) Producers gain area A+B+D.
3. What is the cost of government to this program?
A) Government expenditures are area E+F+G.
B) Government expenditures are area B+C+D.
C) Government expenditures are area D.
D) Government expenditures are area B+C+D+E+F+G.
4. In a competitive market, the following supply and
demand equations are given:
Supply P = 5+0.036Q
Demand P = 100-0.04Q
Where P represents price per unit in dollars, and Q
represents rate of sales in units per year
a. Determine the equilibrium price and output rate!
b. Determine the deadweight loss that would result if the
government were to impose a price ceiling of 40 dollars necessary to keep the price at $1 per pound. However,
per unit!
5. Here is the market for packaged potato chips.
Demand: P = 10-Q
Supply: P = Q-4
Where P is the price in dollars per unit and Q is the quantity
in thousands of units.
a. What is the equilibrium price and quantity?
b. Suppose the government imposes a tax of $1 per unit to
reduce potato chips consumption and raise government
revenues. What will the new equilibrium quantity be?
What price will the buyer pay? What amount per unit will
the seller receive?
c. If tax is removed and a subsidy of $1 per unit granted to
potato chips producers, what will the equilibrium
quantity be? What price will the buyer pay? What
amount per unit (including the subsidy) will the seller
receive? What will be the total cost to the government?
6. The elected officials in a west coast university town are
concerned about the ʺexploitativeʺ rents being charged to
college students. The town council is contemplating the
imposition of a $350 per month rent ceiling on apartments
in the city. An economist at the university estimates the
demand and supply curves as:
QD=5600-8P QS=500+4P
No 6 continued
where P = monthly rent, and Q = number of apartments
available for rent. For purposes of this analysis, apartments
can be treated as identical.
a. Calculate the equilibrium price and quantity that would
prevail without the price ceiling. Calculate producer and
consumer surplus at this equilibrium (sketch a diagram
showing both).
b. What quantity will eventually be available if the rent
ceiling is imposed? Calculate any gains or losses in
consumer and/or producer surplus.
c. Does the proposed rent ceiling result in net welfare gains?
Would you advise the town council to implement the policy?
7. About 100 million pounds of jelly beans are consumed in
the United States each year, and the price has been about
50 cents per pound. However, jelly beans producers feel
that their incomes are too low and have convinced the
government that price supports are in order. The
government will therefore buy up as many jelly beans as
government economists are worried about the impact of
this program because they have no estimates of the
elasticities of jelly bean demand or supply.
a. Could this program cost the government more than $50
million per year? Under what conditions? Could it cost less
than $50 million per year? Under what conditions? Illustrate
with a diagram!
b. Could this program cost consumers (in terms of lost
consumer surplus) more than $50 million per year? Under
what conditions? Could it cost consumers less than $50
million per year? Under what conditions? Use a diagram to
illustrate!
8. Government decides to raise the minimum wage & to
impose a government subsidy.
LS = 10w, LD = 80-10w. where L is the quantity of low-skilled
labor (in million of persons employed each year), and w is
the wage rate (in dollars per hour).
a. What will free-market wage rate & employment level be?
b. Suppose the government sets a minimum wage of $5 per
hour. How many people would then be employed?
c. Suppose that instead of a minimum wage, the govt pays
a subsidy of $1 / hour of each employee. What will total
level of employment & equilibrium wage rate be?
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 BANK SOAL UAS MICROECONOMICS 2020 by @TUTORKU
9. A market is described by following supply & demand:
Qs = 2P
Qd = 300 - P
a. Calculate equilibrium price and quantity!
b. If government imposes a price ceiling of $90, does a shortage or surplus occur? What are the price, quantity supplied,
quantity demanded, and the size of shortage or surplus?
c. If government imposes a price floor of $110, does a shortage or surplus occur? What are the price, quantity supplied,
quantity demanded, and the size of shortage or surplus?
d. Instead of price control, the government impose a tax on producers of $30. What is the new supply equation? Does a
shortage or surplus occurred? What are the price, quantity supplied, quantity demanded, and the size of shortage or
surplus?
10. Suppose that market demand and supply functions for airline tickets from Jakarta to Tokyo are as follow:
Pd = 600-0.3Q
Ps = 300 + 0.2Q
Q is quantity in units and P is price in $.
a. Calculate the equilibrium price and quantity. Show it in the supply-demand diagram!
b. If the government imposes a price ceiling that is $360 lower than equilibrium, what would be the new price? How many
airline tickets will be sold? Calculate the shortage / surplus!
c. If the government imposes a tax of $50 for each airline ticket to buyer, what would happen to the market equilibrium
quantity?
d. How much will the buyer pay after the tax is imposed? How much will the seller receive after the tax is imposed?
e. Calculate the incidence of the tax! Who bears most of the tax?

CHAPTER 10 - MONOPOLY & MONOPSONY

1. For the monopolist shown below, the profit maximizing
level of output is…
5. Which of the following is true for a competitive
buyer?
A) AE = ME
B) AE > ME
C) AE < ME
D) AE greater than or equal to ME
6. For a monopsony buyer, the marginal expenditure
per unit of an input
A) exceeds the average expenditure per unit.
B) is less than the average expenditure per unit.
C) equals the average expenditure per unit.
D) any of the above could be true.
The following graph is for number 7-10.

a. Q1 b. Q2 c. Q3 d. Q4
2. Which of the following is true at the output level where
P=MC?
A) The monopolist is maximizing profit.
B) The monopolist is not maximizing profit and should
increase output.
C) The monopolist is not maximizing profit and should
decrease output.
D) The monopolist is earning a positive profit.
3. A monopolist has equated marginal revenue to zero.
The firm has:
A) maximized profit. B) maximized revenue.
C) minimized cost. D) minimized profit.
7. What quantity will the monopsonist purchase to
4. A monopolist has set her level of output to maximize maximize profit?
profit. The firmʹs marginal revenue is $20, and the price
8. What price will the monopsonist pay when
elasticity of demand is -2.0. The firmʹs profit maximizing
maximizing profit?
price is approximately:
A) $0 9. What quantity will be purchased in a competitive
B) $20 market?
C) $40
10. What is the competitive price?
D) $10
E) This problem can’t be answered without knowing MC 2
 BANK SOAL UAS MICROECONOMICS 2020 by @TUTORKU
11. Devina is a producer in a monopoly industry. Her
demand curve, total revenue curve, marginal revenue
curve and total cost curve are given as follows:
Q = 160 - 4P TR = 40Q - 0.25Q2 MR = 40 - 0.5Q
TC = 4Q MC = 4
a. How much output will Devina produce?
b. The price of her product will be?
c. How much profit will she make?
12. A firm faces demand and marginal revenue curves as
given below:
P = 10-0.1Q MR = 10-0.2Q
The firm’s total and marginal cost curves are:
TC = -10Q+0.0333Q3+130 MC = -10+0.10Q2
Where P is in dollars per unit, output rate Q is in units per
time period, and total cost C is in dollars.
a. Determine the price and output rate that will allow the
firm to maximize profit or minimize losses!
b. Compute the Lerner index!
13. A firm faces the following average revenue curve:
P = 120-0.02Q, where Q is weekly production and P is price,
measured in cents per unit. The firm’s cost function is given
by C = 60Q+25,000. Assume that the firm maximizes profits.
a. What is the level of production, price, and total profit per
week?
b. If the government decides to levy a tax of 14 cents per
unit on this product, what will be the new level of
production, price, profit?
14. Olivia’s boat manufacturing has a monopoly on boat
sales in the region. Olivia’s marginal cost of the 8th boat
produced is $1,200. She produces only 8 boats and can sell
all 8 boats for $1,500. The elasticity of demand at this price
is -2. Is olivia maximizing profits?
15. What is the “rule-of-thumb” price when a monopolist has
a marginal cost of $25 and the product’s price elasticity of
demand is -3.0?
16. Verren has a monopoly on formal gowns in the local
market. She is currently charging $250 per gown and sells
20 in a month. The elasticity demand is -1.5 at this price and
output level. What must be Verren’s marginal cost of the
last gown produced if she is maximizing profits?
17. Kirine operates an ice cream shop in the center of
BSD. She sells several unusual flavors of organic,
homemade ice cream so she has a monopoly over her own
ice cream, though she competes with many other firms
selling ice cream in BSD for the same customers. Kirine’s
demand and cost values for sales per day are given in the
table below. (Everyone who purchases Kirine’s ice cream
buys a double scoop cone because it’s so delicious.)
a. How many ice cream cones should Kirine sell in one
day to maximize her profits?
b. What price should Kirine charge to maximize her
profits?
c. When Kirine maximizes her profits, how much revenue
does she earn per day?
d. When Kirine maximizes her profits, what is her total
cost per day?
e. What is the maximum amount of profit that Kirine can
earn per day?
18. Only one firm produces and sells Lotus Biscoff in the
country of Phoenix, and international trade in Lotus Biscoff
is prohibited. The following equations describe the
monopolist’s demand, MR, TC & MC:
Demand: P = 10 - Q
Marginal Revenue: MR = 10 - 2Q
Total Cost: TC = 3 + Q + 0.5Q2
Marginal Cost: MC = 1 + Q
where Q is quantity measured in units and P is the price
measured in Phoenix dollars.
a. How many Lotus Biscoff does the monopolist
produce?
b. At what price are they sold?
c. What is the monopolist’s profit?
19. Henry Potter owns the only well in town that produces
clean drinking water. He faces the following demand,
marginal revenue, and marginal cost curves:
Demand: P = 70 - Q
Marginal Revenue: MR = 70 - 2Q
Marginal Cost: MC = 10 + Q
a. Graph these three curves. Assuming that Mr. Potter
maximizes profit, what quantity does he produce? What
price does he charge? Show these results on your graph.
b. Mayor George Bailey, concerned about water
consumers, is considering a price ceiling that is $10. What
quantity would be demanded at this new price? Would the
profit-maximizing Mr. Potter produce that amount?
Explain.
c. George’s Uncle Billy says that a price ceiling is a bad
idea because price ceilings cause shortages. Is he right in
this case? What size shortage would the price ceiling
create? Explain.
20. Based on market research, a film production company
in Ectenia obtains the following information about the
demand and production costs of its new DVD:
P = 1,000-10Q TR = 1,000Q-10Q2 MR = 1,000-20Q
MC = 100+10Q
Where Q indicates the number of copies sold and P is the
price in Ectenian dollars.
a. Find the price and quantity that maximize the
company’s profit
b. Find the price and quantity that would maximize social
welfare
c. Calculate the deadweight loss from monopoly!
21. Suppose that an industry is characterized as follows:
C = 100+2Q2 MC = 4Q P = 90-2Q (Industry demand curve)
MR = 90-4Q
a. If there is only one firm in the industry, find the
monopoly price, quantity, and the level of profit!
b. Find the price, quantity, and level of profit if the
industry is competitive! 3
 BANK SOAL UAS MICROECONOMICS 2020 by @TUTORKU
22. Suppose a profit-maximizing monopolist is producing 800 units of output & charging a price of $40 per unit.
a. If the elasticity of demand for the product is -2, find the marginal cost of the last unit produced!
b. What is the firm’s percentage markup of price over marginal cost?
c. Suppose that the average cost of the last unit produced is $15 and the firm’s fixed cost is $2,000. Find the firm’s profit!
23. A monopolist faces the demand curve P = 11-Q, where P is measured in dollars per unit and Q in thousands of
units. The monopolist has a constant average cost of $6 per unit.
a. Draw the average and marginal revenue curves and the average and marginal cost curves. What are the monopolist’s
profit-maximizing price and quantity? What is the resulting profit? Calculate the firm’s degree of monopoly power
using the Lerner index.
b. A government regulatory agency sets a price ceiling of $7 per unit. What quantity will be produced, and what will the
firm’s profit be? What happens to the degree of monopoly power?
24. The employment of teaching assistants (TAs) by major universities can be characterized as a monopsony. Suppose the
demand for TAs is W = 30,000-125n, where W is the wage (as an annual salary), and n is the number of TAs hired. The
supply of TAs is given by W = 1000+75n.
a. If the university takes advantage of its monopsonist position, how many TAs will it hire? What wage will it pay?
b. If, instead, the university faced an infinite supply of TAs at the annual wage level of $10,000, how many TAs would it hire?
25. A monopolist faces the following demand curve: Q = 144/P2 where Q is the quantity demanded and P is price.
Its average variable cost is AVC = Q1/2 and its fixed cost is 5.
a. What are its profit-maximizing price and quantity? What is the resulting profit?
b. Suppose the government regulates the price to be no greater than $4 per unit. How much will the monopolist produce?
What will its profit be?
c. Suppose the government wants to set a ceiling price that induces the monopolist to produce the largest possible
output. What price will accomplish this goal?

CHAPTER 11 - PRICING WITH MARKET POWER

1. An electric power company uses block pricing for 5. A firm sells an identical product to two groups of
electricity sales. Block pricing is an example of consumers, A and B. The firm has decided that
A) first-degree price discrimination. third-degree price discrimination is feasible and wishes
B) second-degree price discrimination. to set prices that maximize profits. Which of the
C) third-degree price discrimination. following best describes the price and output strategy
D) Block pricing is not a type of price discrimination. that will maximize profits?
A) PA = PB = MC.
2. When a firm charges each customer the maximum
B) MRA = MRB.
price that the customer is willing to pay, the firm
C) MRA=MRB=MC.
A) engages in a discrete pricing strategy.
D) (MRA-MRB)=(1-MC).
B) charges the average reservation price.
C) engages in second-degree price discrimination. 6. Under perfect price discrimination, consumer
D) engages in first-degree price discrimination. surplus..
A) is less than zero.
3. A 3rd degree price discriminating monopolist can sell
B) is greater than zero
its output either in local market or on an internet auction
C) equals zero
site (or both). After selling all of its output, the firm
D) is maximized
discovers that the marginal revenue earned in the local
market was $20 while its marginal revenue on the 7. For most residential telephone service, people pay a
internet auction site was $30. To maximize profits the monthly fee to have a hookup to the telephone
firm should... companyʹs line plus a fee for each call actually made.
A) have sold more output in the local market and less at the Under this pricing scheme, the telephone company is
internet auction site. using
B) do nothing until it acquires more information on costs. A) limit pricing.
C) have sold less output in the local market and more on B) second-degree price discrimination.
the internet auction site. C) a two-part tariff.
D) sell less in both markets until marginal revenue is zero. D) two stage price discrimination.
4. You produce stereo components for sale in two 8. A local restaurant sells strawberry pie for $3.00 per
markets, foreign and domestic, and the two groups of slice. However, if you order the prime rib dinner, you
consumers cannot trade with one another. You will can get a slice of pie for only a dollar. This is an
charge the higher price in the market with the example of
A) lower own price elasticity of demand (more inelastic A) bundling.
demand). B) second-degree price discrimination.
B) higher own price elasticity of demand (more elastic C) a two-part tariff.
demand). D) tying.
C) larger teenage population. E) none of the above
D) greater consumer incomes. 4
 BANK SOAL UAS MICROECONOMICS 2020 by @TUTORKU
9. BCY Corporation provides accounting services to a wide variety of customers, most of whom have had a business
association with BCY for more than 5 years. BCY’s demand and marginal revenue curves are:
P = 10,000-10Q MR = 10,000-20Q MC = 5Q
a. If BCY charges a uniform price for a unit of accounting service, Q, what price must it charge per unit, and how many
units must it produce per time period in order to maximize profit? Calculate the consumer surplus too!
b. If BCY could enforce first-degree price discrimination, what would be the lowest price that it would charge and how
many units would it produce per time period?
c. With perfect price discrimination and ignoring any fixed cost, what is total profit? How much additional consumer
surplus is captured by switching from a uniform price to first-degree price discrimination?
10. Suppose that BMW can produce any quantity of cars at a constant marginal cost equal to $20,000 and a fixed cost of
$10 billion. You are asked to advise the CEO as to what prices and quantities BMW should set for sales in Europe and in the
United States. The demand for BMWs in each market is given by:
QE = 4,000,000 − 100PE and QU = 1,000,000 − 20PU
where the subscript E denotes Europe and the subscript U denotes the United States. Assume that BMW can restrict U.S.
sales to authorized BMW dealers only.
a. What quantity of BMWs should the firm sell in each market, and what should the price be in each market? What
should the total profit be?
b. If BMW were forced to charge the same price in each market, what would be the quantity sold in each market, the
equilibrium price, and the company’s profit?
11. Sal’s satellite company broadcasts TV to subscribers in Los Angeles and New York. The demand functions for each of
these two groups are QNY = 60 − 0.25PNY QLA = 100 − 0.50PLA where Q is in thousands of subscriptions per year
and P is the subscription price per year. The cost of providing Q units of service is given by C = 1000 + 40Q where Q =
QNY + QLA.
a. What are the profit-maximizing prices and quantities for the New York and Los Angeles markets?
b. As a consequence of a new satellite that the Pentagon recently deployed, people in Los Angeles receive Sal’s
New York broadcasts, and people in New York receive Sal’s Los Angeles broadcasts. As a result, anyone in New
York or Los Angeles can receive Sal’s broadcasts by subscribing in either city. Thus Sal can charge only a single
price. What price should he charge, and what quantities will he sell in New York and Los Angeles?
c. In which of the above situations, a or b, is Sal better off? In terms of consumer surplus, which situation do
people in New York prefer and which do people in Los Angeles prefer? Why?
CHAPTER 12 - MONOPOLISTIC & OLIGOPOLY
1. The authors cited statistical evidence that the price 4. A situation in which each firm selects its best action
elasticity of demand for Royal Crown cola is -2.4, and given what its rivals are doing, is called
the price elasticity of demand for Coke is roughly -5.5. A) Nash equilibrium.
Which firm likely has stronger brand loyalty among B) Cooperative equilibrium.
customers that provides greater potential for C) Stackelberg equilibrium.
monopoly power in the cola market? D) zero sum game.
A) Coke
B) Royal Crown 5. In the Stackelberg model, suppose the first-mover
C) Both firms should have identical monopoly power has MR = 15 - Q1, the second firm has reaction function
D) We do not have enough information to answer this Q2 = 15 - Q1/2, and production occurs at zero marginal
question. cost. Why doesnʹt the first-mover announce that its
production is Q1 = 30 in order to exclude the second firm
2. Why donʹt some firms in monopolistic competition from the market (i.e., Q2 = 0 in this case)?
earn losses in the long run? A) In this case, MR is negative and is less than MC, so the
A) The firms have enough monopoly power to ensure first-mover would be producing less than the optimal
they always earn profits. quantity.
B) Free entry allows enough firms to remain in the market B) In this case, MR is negative and is less than MC, so the
and maintain the critical mass of firms required to attract first-mover would be producing too much output.
customers. C) This is a possible outcome from the Stackelberg
C) Free exit implies that any unprofitable firms leave the duopoly under these conditions.
market in the long run. D) We do not have enough information to determine if
D) In the long run, firms will build enough brand loyalty this is an optimal outcome for this case.
among customers to ensure a profitable level of sales.
6. American Tire & Rubber Company sells identical radial
3. In the Cournot duopoly model, each firm assumes tires under the firmʹs own brand name and private label
that tires to discount stores. The radial tires sold in both
A) rivals will match price cuts but will not match price sub-markets are identical, MC is constant at $10 / tire for
increases. both types. The firm has estimated the following demand
B) rivals will match all reasonable price changes. curves for each of the markets.
C) the price of its rival is fixed.
PB = 70 - 0.0005QB (brand name)
D) the output level of its rival is fixed.
PP = 20 - 0.0002QP (private label) 5
 BANK SOAL UAS MICROECONOMICS 2020 by @TUTORKU
Quantities are measured in thousands per month & price refers to the wholesale price. American currently sells brand
name tires at a wholesale price of $28.50 and private label tires for a price of $17. Are these prices optimal for the firm?
7. Two firms produce luxury sheepskin auto seat covers, Western Where (WW) and B.B.B. Sheep (BBBS). Each firm has a
cost function given by
C (q) = 30q + 1.5q2
The market demand for these seat covers is represented by the inverse demand equation P = 300 − 3Q where Q = q1 +
q2, total output.
a. If each firm acts to maximize its profits, taking its rival’s output as given (i.e., the firms behave as Cournot
oligopolists), what will be the equilibrium quantities selected by each firm? What is total output, and what is the
market price? What are the profits for each firm?
b. It occurs to the managers of WW and BBBS that they could do a lot better by colluding. If the two firms collude,
what will be the profit-maximizing choice of output? The industry price? The output and the profit for each firm in
this case?
c. The managers of these firms realize that explicit agreements to collude are illegal. Each firm must decide on its own
whether to produce the Cournot quantity or the cartel quantity. To aid in making the decision, the manager of WW
constructs a payoff matrix like the one below. Fill in each box with the profit of WW and the profit of BBBS. Given
this payoff matrix, what output strategy is each firm likely to pursue?
d. Suppose WW can set its output level before BBBS does. How much will WW choose to produce in this case? How
much will BBBS produce? What is the market price, and what is the profit for each firm? Is WW better off by
choosing its output first? Explain why or why not.
8. Suppose that the market demand for mountain spring water is given as follows:
P = 1200-Q
Mountain spring water can be produced at no cost.
a. What is the profit maximizing level of output and price of a monopolist?
b. What level of output would be produced by each firm in a Cournot duopoly? What will the price be?
c. What will be the level of output and price if this industry were perfectly competitive?
9. Two firms compete by choosing price. Their demand functions are
Q1 = 20-P1+P2 and Q2 = 20+P1-P2
where P1 and P2 are the prices charged by each firm, respectively, and Q1 and Q2 are the resulting demands. Note that the
demand for each good depends only on the difference in prices; if the two firms colluded and set the same price, they
could make that price as high as they wanted, and earn infinite profits. Marginal costs are zero.
a. Suppose the two firms set their prices at the same time. Find the resulting Nash equilibrium. What price will each firm
charge, how much will it sell, and what will its profit be? (Hint: Maximize the profit of each firm with respect to its price.)
b. Suppose Firm 1 sets its price first and then Firm 2 sets its price. What price will each firm charge, how much will it sell, and
what will its profit be?
c. Suppose you are one of these firms and that there are three ways you could play the game: (i) Both firms set price at the
same time; (ii) You set price first; or (iii) Your competitor sets price first. If you could choose among these options, which
would you prefer? Explain why.
10. Suppose the supply of non-OPEC oil increases due to new petroleum discoveries in other countries.
What happens to the price of oil on the world market?

CHAPTER 14 - MARKET FOR FACTOR INPUTS

1. A firm should hire more labor when the marginal 3. Under what circumstances are the marginal
revenue product of labor expenditure for an input and the average expenditure
A) equals the wage rate always equal? Where there is a..
B) exceeds the wage rate A) competitive buyer.
C) is less than the wage rate. B) competitive seller
D) Any of these can be true. C) monopoly buyer.
E) None of these are true. D) monopoly seller
2. The marginal revenue product can be expressed as 4. The demand for labor by an industry is given by
the the curve LD = 1200 − 10wD, where LD is the labor
A) additional revenue received from selling one more unit demanded per day and w is the wage rate. The
of product. supply curve is given by LS = 20wS.
B) increment to revenue received from one additional unit A. What is equilibrium wage rate & quantity of labor?
of input hired. B. What is the economic rent earned by workers?
C) marginal physical product of an input times the C. A labor union controls the labor available to
average revenue received from the sale of the product. maximize the rent earned by union members. What
D) average physical product of the input times the will be the quantity of labor employed and the
marginal revenue received from the sale of the final wage rate? (Hint: The union’s marginal revenue
product. curve is given by MR = 120 − 0.2L.)
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 BANK SOAL UAS MICROECONOMICS 2020 by @TUTORKU
5. A firm uses a single input, labor, to produce output q according to the production function
The commodity sells for $150 per unit and the wage rate is $75 per hour.
a. Find the profit-maximizing quantity of L.
b. Find the profit-maximizing quantity of q.
c. What is the maximum profit?
d. Suppose now that the firm is taxed $30 per unit of output and that the wage rate is subsidized at a rate of $15 per hour.
Assume that the firm is a price taker, so the price of the product remains at $150. Find the new profit-maximizing levels of L,
q, and profit.
e. Now suppose that the firm is required to pay a 20% tax on its profits. Find the new profit- maximizing levels of L, q, and
profit

6. The following expressions describe a perfectly competitive labor market. The labor supply curve is:
SL = AE = $3.00 + $0.000375L.
The marginal revenue product of labor curve is:
MRPL = $13.00 - 0.000433L.
a. Find the equilibrium wage in this labor market. Also, find the optimal number of labor hours worked per week. Let L
represent the number of labor hours worked per week, and let W represent the hourly wage of workers.
b. Determine the economic rent earned by labor in this situation.

7. In a competitive labor market, the supply of labor curve is expressed as:

AE = $5 + 0.0025L,where AE represents the average expenditure ($/unit) and L represents units of labor hired per unit of
time. The demand for labor is based on the following expression:
MP= 5-0.001L, where MP represents marginal product of labor. Revenue from the final good is $5 per unit sold in a
competitive market.
a. Determine the equilibrium wage rate and labor employment rate.
b. Compute the economic rent earned by labor.

8. The market for production workers in a Midwestern metropolitan area is highly competitive. The market supply and
demand curves for production workers are given as:
LS = -2500 + 1000W LD = 10500 - 625W,
where LD = labor demand is full time workers per hour, LS = labor supply is full time workers per hour, and W = hourly
wage. White Manufacturing Co. employs production workers in the manufacture of bearings for skate boards. The firmʹs
production function is given by the expression:
Q = 88.8L - 0.5L2,
where Q = output, measured as boxes of bearings per hour, and L = number of workers employed per hour. From this
production function, the marginal product and average product of labor are:
MP = 88.8 - L AP = 88.8 - 0.5L
White currently sells bearings for $10 per box.
a. Determine the equilibrium wage and level of employment in the market. Calculate the total rent that is being earned by
workers.
b. Determine the number of workers that White Manufacturing would employ at the wage determined in part (a). What
total output will White produce?

CHAPTER 17,18 - EXTERNALITIES & ASYMMETRIC INFORMATION

1. Greater consumption of alcohol leads to more motor vehicle accidents and, thus imposes costs on people who do not
drink and drive. Illustrate the market for alcohol. How will the market equilibrium level of alcohol consumption differ from
that of optimal consumption level?

2. There are three industrial firms in Happy Valley.

The government wants to reduce pollution to 60 units, so it gives each firm 20 tradable pollution permits.
a. Who sells permits and how many do they sell? Who buys permits and how many do they buy? Briefly explain why the
sellers and buyers are each willing to do so. What is the total cost of pollution reduction in this situation?
b. How much higher would the costs of pollution reduction be if the permits could not be traded?