BUSINESS ADMINISTRATION DEPARTMENT

HOA LAC
FINAL EXAMINATION
Fall2021
SUBJECT: Microeconomics (ECO111) - Essay
Duration: 190 minutes

STUDENT INFORMATION
Name: Roll number:
Room No: Class:

FOR TEACHER ONLY

MARK MARKED BY Signature of Proctor
(NAME AND SIGNATURE)

Instructions:
Students have 190 minutes for this exam section. Students are not allowed to use any materials.
Simple calculators are allowed. Numerical answers without calculations do not have full credits.
All graphs should have necessary labels.

Question 1 (5 points)
Suppose the market demand curve for a monopolist is given as P = 200 – 2Q. Furthermore,
suppose the MC curve for the firm can be written as MC = 20 + 2Q. The firm’s TC can be
expressed as
TC = 20Q + Q2 + 100. Use this information to answer this set of questions.

a. What is the profit maximizing price and quantity for this monopolist given the
above information? Calculate the monopolist’s profit.
Answer:
To find the profit maximizing quantity for the monopolist we need the firm’s MR
curve. Remember that for a linear downward sloping demand curve, the MR has the
same y-intercept and twice the slope of this demand curve
=>MR = 200 – 4Q
The profit maximizing quantity for the monopolist:
MR = MC => 200 – 4Q = 20 + 2Q => Q = 30
Use this quantity and the demand curve to find the monopolist’s profit maximizing
price: P = 200 – 2Q => P = $140 per unit
Profit is equal to TR – TC:
Profit = ($140 per unit)(30 units) – [(20)(30) + (30)(30) + 100] = $2600.
 b. Calculate the monopolist’s consumer surplus (CS), producer surplus (PS), and
deadweight loss (DWL).
Answer:

200

140
MC

80

MR D
20
Q
30 45 50 100

CS = (1/2) ($200 per unit - $140 per unit) (30 units) = $900
PS = (1/2) ($80 per unit - $20 per unit) (30 units) + ($140 per unit - $80 per unit)
(30 units) = $2700
DWL = (1/2) ($140 per unit - $80 per unit) (45 units – 30 units) = $450

c. Suppose demand increases by 90 units at every price. Find the equation for the
monopolist’s new demand curve. Then, calculate the new profit maximizing price
and quantity for this monopolist given the new demand curve. Calculate the new
level of monopoly profits.
Answer:
The slope of the demand curve is unchanged but at each price the quantity is now 90
units greater than the original quantity at that price. Use these new (Q, P) coordinates
to find the new demand curve: P = b + m Q
The slope of the new demand curve is the same as the slope of the initial demand
curve => P = b – 2Q
Then, plugging in (Q, P) = (140, $100) into this equation we get:
100 = b – 2(140) or b = 380.
=>the new market demand curve is P = 380 – 2Q

To find the profit maximizing quantity for the monopolist we need the firm’s MR’
curve. Remember that for a linear downward sloping demand curve, the MR has the
same intercept and twice the slope of this demand curve
 =>MR’ = 380 – 4Q
Set MR’ = MC to find the profit maximizing quantity for the monopolist:
380 – 4Q = 20 + 2Q => Q’ = 60
Use this quantity and the new demand curve to find the monopolist’s profit
maximizing price: P’ = 380 – 2Q => P’ = $260 Profit is equal to TR – TC:
=>Profit = ($260 per unit)(60 units) – [20(60) + (60)(60) + 100]
=>Profit = $15,600 - $4900 = $10,700.

d. Calculate the value of consumer surplus (CS’), producer surplus (PS’), and
deadweight loss (DWL’) for this monopolist given the information in (c).
Answer:

CS’ = (1/2)($380 per unit - $260 per unit)(60 units) = $3600

PS’ = (1/2)($140 per unit - $20 per unit)(60 units) + ($260 per unit - $140 per unit)
(60 units) = $10,800
DWL’ = (1/2)($260 per unit - $140 per unit)(90 units – 60 units) = $1800

380

260
MC

140

MR D
20
Q
60 90 95 170

Question 2 (5 points)

Kate’s Katering provides catered meals, and the catered meals industry is perfectly competitive.
Kate’s machinery costs $100 per day and is the only fixed input. Her variable cost consists of the
wages paid to the cooks and the food ingredients. The variable cost per day associated with each
level of output is given in the accompanying table.

Q VC ($)
0 0
 10 200
20 300
30 480
40 700
50 1,000

a. Calculate the total cost, the average variable cost, the average total cost, and the
marginal cost for each quantity of output.
Q VC TC MC AVC ATC
0 $0 $100 - - -
10 $200 $300 $20 $20 $30
20 $300 $400 $10 $15 $20
30 $480 $580 $18 $16 $19.33
40 $700 $800 $22 $17.5 $20
50 $1,000 $1,100 $30 $20 $22

b. What is the break-even price? What is the shut-down price?

Answer:
 Kate’s break-even price, the minimum average total cost, is $19.33, at an output
quantity of 30 meals
 Kate’s shut-down price, the minimum average variable cost, is $15, at an output
of 20 meals

c. Suppose that the price at which Kate can sell catered meals is $21 per meal. In the
short run, will Kate earn a profit? In the short run, should she produce or shut down?
Answer:
When the price is $21, Kate will make a profit: the price is above her break-even price.
And since the price is above her shut-down price => Kate should produce in the short run, not
shut down.

d. Suppose that the price at which Kate can sell catered meals is $17 per meal. In the
short run, will Kate earn a profit? In the short run, should she produce or shut down?
Answer:
When the price is $17, Kate will incur a loss: the price is below her break-even price. But
since the price is above her shut-down price => Kate should produce in the short run, not shut
down.