Sample Exam 2 for BSP1703 PDF

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Sample Exam 2 Part1: MCQ 1. Identify the false statement. a) b) c) d) 2. Suppose the equilibrium price of milk is $3 per gallon but the government sets the market price at $4 per gallon. The market mechanism will force the milk price back down to $3 per gallon unless the government: a) b) c) d) 3. A...

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Sample Exam 2 Part1: MCQ 1.

Identify the false statement. a) b) c)

2.

Suppose the equilibrium price of milk is $3 per gallon but the government sets the market price at $4 per gallon. The market mechanism will force the milk price back down to $3 per gallon unless the government: a) c) d)

3.

As output increases the difference between a firm’s average total cost and average variable cost curves cannot rise. Whenever a firm’s average total costs are rising as output rises, average variable costs must be rising too. If a firm employs only one variable factor of production, labor, and the marginal product of labor is constant, then the marginal costs of production are constant too. If labor obeys the law of diminishing returns, and is the only factor of production used by the firm, then at every output level short-run average variable costs exceed marginal costs.

rations the excess demand for milk among consumers. buys the excess supply of milk and removes it from the market. Both A and B are plausible actions. The government cannot maintain the price above the equilibrium level.

Consider the following statements when answer the question I. When a competitive industry’s supply curve is perfectly elastic, then the sole beneficiaries of a reduction in input prices are on consumers. II. Even in competitive markets firms have no incentives to control costs, as they can always pass on cost increases to consumers. a) I and II are true. b) I is true, and II is false. c) I is false, and II is true. d) I and II are false

4.

Which of the following statements about natural monopolies is true? a) b) c) d)

Natural monopolies are only found in the markets for natural resources (like crude oil and coal). For natural monopolies, marginal cost is always below average cost. For natural monopolies, average cost is always increasing. Natural monopolies cannot be regulated.

5.

A monopolist has set its output to maximize profit. The firm’s marginal revenue is $20, and the price elasticity of demand is -2. Then the firm’s profit maximizing price is approximately: a) b) c) d)

$10 $20 $40 cannot be answered without knowing the marginal cost.

Part 2: Structured Questions 6. In a local market there are 100 shipbuilding firms, numbered 1 through 100. Each firm can build up to 12 ships a year and maximizes its profits given the market price. Let q denote the number of ships built per year by a particular firm, and suppose that their cost functions are as follows: Firm 1: c(q1) = 10 + q1 Firm 2: c(q2) = 10 + 2q2 Firm 3: c(q3) = 10 + 3q3 … Firm 100: c(q100) = 10 + 100q100 That is, for each k, from 1 to 100, shipbuilder k has a cost function c(qk) = 10 + k*qk. Assume the fixed cost can be recovered or avoided if the firm shuts down: it is only paid if the builder produces a positive level of output. If the price of ship is 50, how many firms will choose to remain in the market? How many ships will be built per year in total?

7. The BCY Corporation provides accounting services to a wide variety of customers, most of whom have had a business association with BCY for more than five years. BCY’s demand curve is: P = 10,000-10Q, BCY’s marginal cost of service is: 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. 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?

8. A retailer is considering two promotion strategies for selling a new product: 25%-off discount or “4-for-3” (buy three and get a fourth free, i.e., pay the amount of money for three units and get another unit free.) Use demand curve Q=16-2P, and original price P*=4. a. Which method is more effective in promoting sales? Show by computing the equilibrium quantity sold under each pricing scheme. b. If the retailer offers both promotions, which one is more desirable for consumers?

------Solutions: MCQ: DBBBC

Structured Questions: 6. For any firm, if it does not produce, profit = 0 If produce positive number of ships, the net profit is Pq-c(q)=50q-10-kq=(50-k)q-10. It is optimal to produce positive amount if (50-k)q-10>0 Clearly, if k>=50, q=0 If k12 The benefit for consumer to consume the 8th unit is P=(16-8)/2=4. So the benefit of another 4 units (second package) is (4+6)*4/2=20>12 The benefit for consumer to consume the 12th unit is P=(16-12)/2=2. So the benefit of a third package is (2+4)*4/2=12=12 Consumers will purchase 3 packages (12 units) under the 4-for-3 promotion. So this is more effective in promoting sales. b. 25% off discount: P=3, Q=10. CS=(8-3)*10/2=25 4-for-3: CS=60-36=24 Hence the 25% off is a better deal....