Final exam

revision
FORMAT
 FORMAT

I. MULTIPLE CHOICE (4 POINTS)

II. SHORT ANSWER (2 POINTS)
III. PROBLEMS/EXERCISE (4 POINTS)
 FORMAT

I. MULTIPLE CHOICE (4 POINTS)

• MCQS IN QUIZ REVIEW
• MCQS IN MIDTERM TEST
• MCQS IN TEXT BOOK
 FORMAT

II. SHORT ANSWER (2 POINTS)

- QUICK QUIZ ( TEXT BOOK)
- SHORT ANSWERS IN MIDTERM
 Example
Example 1: Using a Supply-Demand diagram, show a labor market with a binding
minimum wage. Analyze who are better off by the minimum wage, and who are hurt by
the minimum wage and show in the diagram.

Example 2: How price floors affect market outcome (binding and not binding cases)? The
policy on price floor is to protect whom? Why economists often oppose price floor?

Example 3:
When the Sharons had a monthly income of $4,000, they usually ate out 8 times a month.
Now that the couple makes $4,500 a month, they eat out 10 times a month. Compute the
couple's income elasticity of demand using the midpoint method. Explain your answer. Is
a restaurant meal a normal or inferior good to the couple?

Example 4: Answer each of the following questions

a. What is producer surplus, consumer surplus and how are they measured?
b. Other things equal, what happens to producer surplus when the price of a good rises?
Illustrate your answer on a supply curve.
c. Other things equal, what happens to consumer surplus when the price of a good
rises? Illustrate your answer on a supply curve.
 FORMAT

III. PROBLEMS/EXERCISE (4 POINTS)

1. Perfect competition
2. Monopoly
3. Tax
4. Price floor, price ceiling
5. Consumer surplus, producer surplus
 1. PERFECT
COMPETITION
PERFECT COMPETITION

MR = D = AR = P
PERFECT COMPETITION
PERFECT COMPETITION
 Figure The Competitive Firm’s Short Run Supply Curve

Costs
Firm’s short-run
If P > ATC, the firm supply curve MC
will continue to
produce at a profit.

ATC

.
If P > AVC, firm will
continue to produce in AVC
the short run.

Firm
shuts
. The firm’s SR supply
down if
P< AVC curve is the portion of
0 Quantity

its MC curve above

AVC.
Copyright © 2004 South-Western
 SUMMARY

• Profit-maximization: MC = MR
• Perfect competition: P = MR
• So, in the competitive eq’m: P = MC
• Firm earn positive economic profit: P>ATC
• Firm get loss: ATC>P>AVC
• Firm decide to shut down in SR: P<AVC
• In LR, firm earn zero-economic profit
• The firm’s supply curve is the portion of its MC
curve above ATC.
ACTIVE LEARNING 1
Identifying a firm’s decision

Total cost function of a perfect competition firm is:

TC = Q2 + Q + 225
a. At P = 35$, calculate Q* and Profit MAX
b. Calculate the break-even point of this firm
c. At P = 5$, should this firm close its business?
d. What is the supply function of this firm?
e. Present the results in a graph
 FORMULA REVIEW
TR = P*Q ; TC = VC + FC ; VC = AVC*Q
MR = DTR/DQ = (TR)’Q
MC = DTC/DQ = (TC)’Q
∏ = TR – TC = P*Q – AC*Q = (P-AC)*Q
In perfect competition: P = AR = MR
Firm wants to maximize profit  MC = MR
• If P>ATC: Firms produce and earn profit
P break-even point = ATC min
• If ATC>P>AVC: Firms produce and get loss
• If P<AVC: Firms shut down
P closing point = AVC min
Example 2
Identifying a firm’s decision

A firm in competitive market has demand and total cost functions as follows:
P = 2600 – 10Q
TC = 2.5Q2 + 100Q + 5000
Questions:
a. What are fixed cost (FC), variable cost (VC), average total cost (ATC) and marginal
cost (MC)?
b. What are price and quantity for the firm to maximize profits? Calculate ∏
c. Suppose the government imposes a tax of $10/unit, what are the price and
quantity when firm maximize profits?
Example 3
Identifying a firm’s decision

A firm in perfect competitive market has AVC ($) = 2Q + 4 and FC

($) =200, where Q is in units.
a. At P = $64/unit, calculate Q* and Profit MAX Π.
b. Calculate the break-even point of this firm.
c. At what price should this firm close its business?
d. What is the firm’s decision when the market price is P = $9?
e. Present all the above results on a graph.
2. MONOPOLY
 Profit-Maximization
Costs and
Revenue MC

D
MR

Q Quantity

Profit-maximizing output
=> The profit-maximizing Q is where MR = MC
 The Monopolist’s Profit
Costs and
Revenue MC

As with a P
ATC
competitive firm, ATC
the monopolist’s
profit equals D
(P – ATC) x Q
MR

Q Quantity

CHAPTER 15 MONOPOLY
 A Monopoly’s Profit

• Profit equals total revenue minus total costs.

– Profit = TR - TC
– Profit = (TR/Q - TC/Q)  Q
– Profit = (P - ATC)  Q
As Q is always positive, firm gets profit when P>ATC
As Q is always positive, firm get loss when P<ATC
• P>ATC: profit >0
• P<ATC: Profit <0
• P= ATC: Profit = 0
Deadweight Loss of a Monopoly
Consumer
Price
surplus
Deadweight
PM loss

Producer
Surplus D
MC MR

QM Quantity
A C T I V E L E A R N I N G 3:
Monopoly decisions and Government policies
A monopolist is facing with a demand curve: P = 24 – 2Q
and total cost function: TC=2Q2+15
a. Calculate P1, Q1 and ∏1 when firm maximize profit
b. Calculate P2, Q2 and ∏2 when firm maximize total
revenue
c. Government imposes 3$/ unit tax on producer. What is
new P3 and Q3 to maximize profit
d. Calculate the CS, PS
e. Calculate the DWL caused by this monopolist
 FORMULA REVIEW
TR = PxQ
MR = DTR/DQ = (TR)’Q
MC = DTC/DQ = (TC)’Q
∏ = TR - TC
a. Firm maximizes profit  MR = MC
b. Firm maximizes total revenue  MR = 0
c. Government imposes 3$/ unit tax on producer => MR = MCtax
d. CS = SABC ; PS = SCBFG
e. DWL = SBEF
A C T I V E L E A R N I N G 3:
Monopoly decisions and Government policies
Price
A Deadweight
???
loss MC
B
??? C
??? E

???
F
D
MR
? Quantity
G ??? ???
A C T I V E L E A R N I N G 3:
Monopoly decisions and Government policies
Price
A Deadweight
24
loss MC
C B
18
16 E
12
F
D
MR
? Quantity
G 3 4
A C T I V E L E A R N I N G 4:
Monopoly decisions and Government policies
A monopolist is facing with a demand curve: P = 220 – 2Q
and total cost function: TC = Q2 + 40Q+ 1400
a. Calculate P1, Q1 and ∏1 when firm maximize profit
b. Calculate P2, Q2 and ∏2 when firm maximize total
revenue
c. Government imposes 10$/ unit tax on producer. What is
new P3 and Q3 to maximize profit
d. Calculate the PS, CS, and DWL caused by this
monopolist.
A C T I V E L E A R N I N G 5:
Monopoly decisions and Government policies
A monopolist is facing with a demand curve: P = 18 – 2Q
and total cost function: TC = Q2
a. Calculate P1, Q1 and ∏1 when firm maximize profit
b. Calculate P2, Q2 and ∏2 when firm maximize total
revenue
c. Government imposes 3$/ unit tax on producer. What is
new P3 and Q3 to maximize profit
d. Calculate the DWL caused by this monopolist.
3. TAX
A C T I V E L E A R N I N G 1:
Tax and Government policies
You are given the following information about the market for bags:
P = (Q+1)/2
P = 11-Q
(P: $; Q: bags)
a. Find the equilibrium price and quantity of bags in this market.
b. Calculate market equilibrium price and quantity.
c. Suppose that the government decides to impose an excise tax of
$0.5/unit on producers in this market. Find tax burden on buyers
and sellers.
d. Demonstrate your answers with graphs.
4. PRICE FLOOR &
PRICE CEILING
A C T I V E L E A R N I N G 1:
Price floor & Price ceiling

A market is described by the following supply and demand curves:

QS = 2P
QD = 300 - P
a. Solve for the equilibrium price and quantity.
b. If the government imposes a price ceiling of $90, does a
shortage or surplus (or neither) develop? What are the price,
quantity supplied, quantity demanded, and size of the shortage or
surplus?
c. If the government imposes a price floor of $90, does a shortage
or surplus (or neither) develop? What are the price, quantity
supplied, quantity demanded, and size of the shortage or surplus?
 5. CONSUMER &
PRODUCER SURPLUS
 Example 1
Suppose that the demand
and supply schedules for
rental apartments in New
York are as given in the
following table:

a. What is the market equilibrium rental price per month and the market equilibrium
number of apartments demanded and supplied?
b. If the local government sets the maximum monthly rent at $1,500, will there be a
surplus or a shortage? Of how many units?
c. If the local government declares that the minimum rent that can be charged is $2,500
per month, will there be a surplus or a shortage? Of how many units?