University Microeconomics Tutors in New York
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Sample Midterm Exam
Question 1 (12 points)
The painted necktie industry is perfectly competitive. Each firm has an identical cost structure and the minimum efficient scale of the typical firm is qMES = 20. The minimum average cost is $10. The market demand is Qd = 1,500 – 50P.
Find the long run equilibrium price, the long run equilibrium quantity and the long run equilibrium number of firms. The short run total cost of the typical firm is TCSR(q) = 0.5q2 -10q + 200.
What is the shutdown price of the typical firm? What is the short run supply curve of the typical firm?
Find the short run market supply curve.
Painted necktie become more fashionable and the market demand function shifts upward to Q = 2,000-50P.
Find the new short run equilibrium price and quantity.
In a diagram, illustrate the demand and supply curves and highlight the industry producer surplus when the market is in short run equilibrium.
In a separate diagram, illustrate the typical firm’s MC, AVC and ATC curves and the short run profit or loss.
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Question 2 (3 points)
Suppose a firm is maximizing profits in the short run with variable factor x1 and fixed factor x2. If the price of x2 goes down, what happens to the firm’s use of x1? What happens to the firms’ level of profit?
Question 3 (5 points)
Suppose a consumer earns an income of $45,000 in period 1 and an income of $50,000 in period 2. In period 1, the consumer can borrow funds from a local loan-shark at an interest if 25% and he can save money by hiding it in a cupboard.
In a diagram, illustrate this consumer’s inter-temporal budget constraint. The consumer’s utility function is U = .
In period 1, will this consumer borrow funds? Will he save money? Clearly justify your answer.
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In your diagram, add an indifference curve to illustrate the consumer’s optimal inter-temporal allocation of income.
Question 3 (11 points)
Dave is looking for a job. He has a time endowment of 80 hours per week. He has some experience waiting on tables and he could do work for The Hobbit, a new restaurant. At The Hobbit, the hourly pay (including tips) is $20 and he could tailor the number of hours worked according to his needs. Alternatively, he was offered an internship at a design company. The internship would pay $30 an hour, however he could work only up to 15 hours each week. Dave has no income from other sources and does not want to hold two jobs.
In a Leisure time/Consumption diagram, illustrates Dave’ budget constraint if he chooses to intern at the design company. Dave’s utility function for consumption (C) and leisure (N) is U (C, N ) =.
Suppose Dave chose to work at The Hobbit;
How many hours would he work per week? What would his weekly earnings be? Show your work. Suppose Dave chose to work at the design company;
How many hours would he work there and what would his level of consumption be?
What does Dave choose to do? Why?
Dave’s grandmother decides to help him out financially and starts sending him $400 each week. Will Dave keep working? If so, for which company? Discuss.
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Question 4 (12 points)
In California, a firm uses skilled labor (SL) and unskilled labor (UL) to produce videogames according to the production function q = LS0.5 x LU.
Does the production function exhibit increasing, constant or decreasing returns to scale? Justify your answer. Skilled workers are paid $64 an hour while unskilled workers are paid $16 an hour.
Currently, the firm employs 9 skilled workers under a two-year contract. The workers signed a non- agreement.
What is the short run conditional demand for unskilled labor? Show your work.
What is the short run total cost function? Show your work.
What is the long run conditional demand for unskilled labor?
What is the long run total cost function?
Suppose skill biased technological change altered the firm’s production function.
If the cost of skilled and unskilled labor remained unchanged, in the long run would the firm increase or decrease the number of unskilled workers it employed? Briefly explain.
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Question 5 (7 points)
An economic agent owns a house worth $120,000. There is one chance in 20 that the house will burn down. The agent has utility from wealth represented by the utility function U(W) = lnW.
Is this economic agent risk averse? Justify your answer.
To selected customers, Coverall, an insurance company, sells a policy that for a premium of $3,500 covers a potential loss of $80,000.
Would the agent apply to buy this policy? Why?
The agent is refused coverage by Coverall. However, Safety-first, a competitor offers him a contract with a premium of $6 for each $100 of coverage.
Would this policy be a fair gamble for the economic agent? Justify your answer.
Under this policy, what is the agent’s optimal amount of coverage?
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