1.

PurplePro faces demand for its product Q = 1000 2P. A profit maximizing firm, PurplePro sets its price P equal to 300. The Lerner index for PurplePro equals: a) 1/4 b) 1/3 c) 1/2 d) 2/3 e) 3/4

2.

PurplePro faces demand for its product Q = 1000 2P. A profit maximizing firm, PurplePro sets its price P equal to 300. For total industry or market demand, the price elasticity of demand equals 0.5. The Rothschild index equals: a) 1/4 b) 1/3 c) 1/2 d) 2/3 e) 3/4

3.

Following the merger of Acme, Inc. and Sesame Consolidated, the Herfindahl-Hirschman index for the industry increased from 1600 to 1840. Before the firms merged, Sesame Consolidated accounted for 25 percent of total industry sales. We can determine that, pre-merger, Acme, Inc. accounted for ______ percent of total industry sales. a) 1.2 b) 2.4 c) 4.8 d) 6.0 e) 9.2

4.

Consider a firm with a production function Q = 20 Min(5K, L). If the rental rate of capital (K) equals 1000 and the wage rate equals 400, the minimum per unit cost of producing 1,200 units of output equals: a) 15 b) 20 c) 25 d) 30 e) 40

5.

If |MRTS| > w/r a firm can reduce its costs of production in the long run employing: a) more labor and less capital. c) less labor and more capital b) less labor and less capital. d) more labor and more capital. Consider a firm with demand Q = 840 2P and cost of production C(Q) = 35,000 + Q2. Marginal cost of production MC(Q) = 2Q. If this firm is able to practice 1st degree price discrimination it will produce and sell _____ units of output to maximize profit. a) 140 b) 152 c) 168 d) 184 e) None of the above are correct.

6.

7.

Consider a firm with demand Q = 840 2P and cost of production C(Q) = 35,000 + Q2. Marginal cost of production MC(Q) = 2Q. If this firm is able to practice 1st degree price discrimination it will earn a maximum profit equal to: a) 9,620 b) 0 c) 280 d) 6,440 e) None of the above are correct.

BLUE Exam 2

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Economics 419 Spring 2013

Consider a firm which faces demand Q = 1000 2P for its product, a good it produces in two plants. For any given quantity Q1 produced in Plant 1 cost of production C(Q1) = 15,500 + 100Q1 + 5Q12, with dC(Q1) = 100 + 10Q1. In Plant 2, cost of production C(Q2) = 6,250 + 50Q2 + (5/2)Q22, with dC(Q2) = 50 + 5Q2. This firm is a non-price discriminating firm which maximizes profits. 8. This firm will produce ______ units of output in Plant 1. a) 10 b) 30 c) 70 d) 100 Cost of production in Plant 2 for this firm will equal: a) 22,000 b) 22,500 c) 23,000 d) 23,500 This firm will set its price equal to: a) 375 b) 400 c) 425 This firms maximum profit equals: a) -5,000 b) 0 c) 2,500

e) None of the above are correct.

9.

e) None of the above are correct.

10.

d) 450

e) None of the above are correct.

11.

d) 7,500

e) None of the above are correct.

12.

If a cost minimizing firms production function Q = 2K + L, we can conclude that if the firm is using all capital (no labor) the wage rental ratio is: a) greater than 2. b) less than . c) less than 2. d) greater than .

BLUE Exam 2

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Economics 419 Spring 2013

Consider a profit maximizing firm which produces in one plant, and sells in two markets. For any given level of output Q, the firms cost of production C(Q) = 1,466,000 + 200Q + 5Q2, with dC(Q)/dQ = 200 + 10Q. Quantity demanded of the firms product in Market 1 is Q1 = 1440 (1/5)P1. In Market 2, quantity demanded Q2 = 1280 (1/5)P2. 13. If this firm is able to practice 3rd degree price discrimination it will sell _____ units of output in Market 1. a) 140 b) 180 c) 220 d) 260 e) None of the above are correct. If this firm is able to practice 3rd degree price discrimination it will set is price equal to _____ in Market 2. a) 5,100 b) 5,500 c) 5,900 d) 6,300 e) None of the above are correct. At this 3rd degree price discriminating firms profit maximizing level of output, marginal cost of production equals: a) 4,600 b) 4,800 c) 5,000 d) 5,200 e) None of the above are correct. If this firm is able to practice 3rd degree price discrimination its maximum profit equals: a) -2,000 b) 0 c) 3,000 d) 6,000 e) None of the above are correct.

14.

15.

16.

This problem continues on the next page

BLUE Exam 2

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Economics 419 Spring 2013

Consider a profit maximizing firm which produces in one plant, and sells in two markets. For any given level of output Q, the firms cost of production C(Q) = 1,466,000 + 200Q + 5Q2, with dC(Q)/dQ = 200 + 10Q. Quantity demanded of the firms product in Market 1 is Q1 = 1440 (1/5)P1. In Market 2, quantity demanded Q2 = 1280 (1/5)P2. 17. If this firm is not able to price discriminate it will sell _____ units of output in Market 1. a) 140 b) 210 c) 250 d) 300 e) None of the above are correct. If this firm is not able to price discriminate, its marginal revenue in Market 2 will equal: a) 4,200 b) 4,400 c) 4,800 d) 5,000 e) None of the above are correct. If this firm is not able to price discriminate, its profit will equal: a) -14,000 b) 6,000 c) 0 d) 1,000 e) None of the above are correct.

18.

19.

20.

For a given industry, the C4 ratio equals 1 and the HHI = 3,600. The market structure must be: a) perfect competition c) Oligopoly b) Monopoly d) Monopolistic Competition In the long run, in a market in which we have monopolistic competition, we would expect. a) average revenue to be greater than marginal revenue. b) output produced to be at the level of minimum efficient scale. c) marginal cost to be equal to average variable cost. d) All of the above. e) None of the above.

21.

BLUE Exam 2

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Economics 419 Spring 2013

Consider a firm for which production Q = 30K2/3L1/3. For this production function, we have Q/L = 10K2/3L-2/3 and Q/K = 20K-1/3L1/3. The firm must pay a wage w = 300 to acquire labor and a rental rate r = 4,800 to acquire capital. 22. If this firm employs equal units of capital and labor, with K = L, the marginal rate of technical substitution will be (in absolute value) ______ unit(s) of capital per unit of labor. a) 1/2 b) 1/3 c) 2 d) 3 e) None of the above are correct. To minimize cost of production of 30,000 units of output this firm will employ _____ units of labor. a) 500 b) 1,500 c) 2,750 d) 4,000 e) None of the above are correct. Minimum per unit cost of producing 30,000 units of output for this firm equals: a) 40 b) 80 c) 120 d) 160 e) None of the above are correct.

23.

24.

25.

Current Department of Justice guidelines for considering taking action to block a potential merger are 1) the current HHI for the industry, pre-merger, is greater than _____ and 2) the effect of the merger will be to raise the HHI by more than ____. a) 1600; 200 b) 1800; 100 c) 2100; 300 d) 2400; 200 e) None of the above are correct. Classic Flicks, a movie theater, offers a student ticket for $5.00. Non-students must pay $9.00 for a ticket. The price elasticity of demand for theater tickets for non-students equals -1.5. If this theater is maximizing profit the price elasticity of demand for theater tickets for students must be equal to: a) -3.00 b) -2.50 c) -2.00 d) -0.75 e) None of the above are correct.

26.

BLUE Exam 2

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Economics 419 Spring 2013

Marys utility derived from annual income I and daily hours spent shirking on the job S is U(S,I) =360 S0.1I0.9. Income I is expressed in thousands of dollars: e.g., if her income is $200,000, I = 200. For Marys utility function,

U(S,I) U(S,I) = 36S-0.9 I0.9 and = 324S0.1I-0.1 . For each hour Mary chooses to work on average daily rather than S I

shirk, annual profits of her firm are increased by $200,000. If Mary chooses to shirk all of the eight hours of her working days the firms profits will equal $1,000,000. Consider three alternative compensation packages for Mary: PACKAGE A: Mary receives a base salary of $90,000 per year plus 5 percent of the firms profits. PACKAGE B: Mary receives as base salary of $40,000 per year plus 10 percent of the firms profits. PACKAGE C: Mary receives a flat salary of $140,000 per year. Here firm profits and changes in firm profits refer to profits before Mary is compensated. 27. Marys marginal rate of substitution (thousands of dollars of annual income she is willing to forego for an extra hour of daily leisure time) for any combination of annual income I and daily hours spend shirking S is: a) I/9S b) 9I/S c) S/9I d) 9S/I e) I/S If offered Package A, Mary will work ______ hours per day. a) 4.4 b) 5.8 c) 6.5 d) 8.0

28.

e) 3.6

29.

If offered Package B, Marys income will be ______ thousand dollars per year. a) 198 b) 212 c) 240 d) 270 e) 300 Marys utility under Package C will be: a) 25,776.4 b) 32,654.8 c) 37,855.3

30.

d) 45,451.0

e) 57,828.1

31.

Reading > as is preferred to, Mary would rate these compensation packages as: a) A > B > C b) B > A > C c) C > A > B d) B > C > A e) C > B > A

BLUE Exam 2

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Economics 419 Spring 2013

Suppose Acme, Inc. is the only employer in its labor market, but faces a perfectly competitive market for its product. It is able to sell as much as it wants at a price equal to $5 per unit of output. Acmes production function, given levels of labor employment, is Q = 100L 5L2 with marginal product of labor MPL = 100 10L. It confronts a labor supply curve L = (1/5)W 4. Labor is Acmes only variable input. Fixed costs of production equal $1,200. 32. If the company cannot wage discriminate, Acme, Inc. will employ _____ units of labor to maximize profits. a) 2 b) 4 c) 6 d) 8 e) None of the above are correct. If the company cannot wage discriminate, it will offer a wage equal to _____ per unit of labor. a) 60 b) 80 c) 100 d) 120 e) None of the above are correct.

33.

34.

Workers in Acmes labor market form a union, and demand a wage equal to 150 per unit of labor. If Acme accepts this labor demand its maximum profits will equal _______ . a) 25 b) 50 c) 100 d) 175 e) None of the above are correct.

35.

Ceteris paribus, an increase in complexity that increases the marginal cost of writing contracts with suppliers for critical inputs will: a) decrease the optimal duration of the contracts involved. b) increase the hold up problem associated with acquiring inputs via contracts with suppliers. c) increase the internal transfer price charged by upstream divisions of the firm to the final producing division. d) All of the above are correct. e) None of the above are correct.

BLUE Exam 2

Page 7 of 7

Economics 419 Spring 2013