Final Exam 1) 7.5 points Suppose that your factory faces a total product curve that contains the following points: Q of Labor total product 6 1 10 2 13 3 15 4 18 5 23 6 30 7 40 8 If labor costs $2 per unit, and you have fixed cost of $30, construct a table to show your TVC, TC, MC, AC and AVC. 2) 7.5 points Consider a competitive constant-cost industry where firms are currently earning zero economic profit. Say demand falls in the industry. Compared to the original values before demand shifted, say what happens to a) market price in the SR(short run), b) market quantity in the SR, c) a firm’s quantity in the SR, d) market price in the LR(long run), e) market quantity in the LR, f) a firm’s quantity in the LR. A graph is not required in this answer, but using one may help.

Size of Value of visit Crowd per visitor 1 $20 2 18 3 16 4 14 5 12 6 10 7 8 8 6 9 4 10 2 3) 10 points The town Des Waynes, a lovely setting to the west of Des Plaines, recently opened a solarium, a place to relax and soak up the sun in a controlled environment. The table at the right shows the value of a visit per visitor at various amounts of people at the solarium. a) Create two additional columns; one that shows the total value of visits and one that shows the social marginal benefits of the various crowd sizes. b) Before the solarium was in town, people hung out at the town square. The value of the visit in the square is $8. If there is no fee to visit the solarium, how many people will visit? Explain how you arrived at your answer. c) How many people would visit the solarium if the fee to enter is $2? d) What fee would lead to the largest social gain from the solarium and what is that gain?

4) 10 points The table below shows the demand for dog food at Charlie’s Dog Factory and the total cost of producing various quantities. a) Fill in the rest of the table. b) How much output should Charlie sell to maximize profit, and what price should be charged? c) If Charlie is required to pay a $5 annual license fee to operate his dog factory, what happens to the total cost numbers? What happens to his MC numbers? What happens to the amount of dog food he sells and the price he charges? What happens to profit? Q P TR MR TC MC profit 1 15 3 2 13 8 3 11 15 4 9 24 5 7 35 6 5 48

$ 5) 10 points Smokey's chicken wings sell for $5 per box and the private marginal costs of production are MCp. a) Say Smokey's doesn’t know about any problems with his establishment. How many boxes does he produce and what is his producer surplus? b) One day all the neighbors in the area of Smokey's establishment say they are experiencing damage because Smokey's production process is smoky. Say the true costs of production are shown in MCs MCp 2000 5 4500 2000 2 6000 8000 4500 Q per box 3000 5000 the social marginal cost curve MCs. What is the value of their loss? c) Say the neighbors take Smokey's to court to get him to stop. But Smokey’s wins. Assuming there really is damage, describe how the neighbors might try to pay-off Smokey’s to reduce their problem. Be specific in the amount of the payment, why Smokey’s would accept it and why the neighbors would offer the amount. Does Smokey’s make more than 0 boxes with the payoff? If so, how much?

6) 10 points Roses Wine

Suppose the only goods you consume are wine and roses Suppose the only goods you consume are wine and roses. On Tuesday the price of wine goes up, and at the same time your income increases by just enough so that you are equally happy as you were on Monday. a) Label the points you were at Monday and Tuesday. b) What happens to the amount of wine consumed from Monday to Tuesday? On Wednesday there are no new price changes, but your income changes to the point where you can just exactly afford Monday’s basket. c) Are you happier on Monday or Wednesday? d) Is it possible to say with certainty whether you buy more wine on Wed. or Mon.? If not, what would your answer depend on? e) Is it possible to say with certainty whether you buy more wine on Wed. or Tues.? If not, what would your answer depend on?

7) 10 points - In the graph at the right show a price in the graph where a firm in perfect competition would have (and let me know by writing a statement about which) a) economic profit > 0, b) economic profit = 0, c) economic profit < 0, but the firm still operates, d) economic profit < 0, but the firm shuts down. e) True or False and explain: The MC above the AC is the supply curve of the firm in the short run. $ MC AC AVC Q

8) 10 points – Say you have a 3rd degree monopolist that sell its out in two markets. The demand in those markets are represented by the following two demand curves: P = 10 – Q and P = 20 -2Q. Plus, the firm makes its output in two plants with the marginal cost in each plant as follows: MC = 1 + Q and MC = 2 + .5Q a) What is the total amount of output the firm would like to sell? b) How much output will the firm make in each plant? c) How much output will the firm sell in each market? d) What price will the firm charge in each market?