Micro Economics Take Home portion of the final Exam Chapter 10 1. Farmer Dorr figures that her fixed costs are $2,000, and the relevant portion of her total cost curve is:                                           Thousands of                   Total Cost Bushels           (in thousands of dollars)                                                     10                                   10.70                                                     11                                   11.45                                                     12                                   12.25                                                     13                                   13.10                                                     14                                   14.00                                                     15                                   15.00                                                     16                                   16.10                                                     17                                   17.32                                                     18                                   18.75                                                     19                                   20.30             a)  Calculate Farmer Dorr’s schedules of average cost, marginal cost, total variable cost, and average variable cost.             b)  If Farmer Dorr is a perfect competitor, what level of output should she produce, if the market price is:                   (i)  $1.50   (iii) $0.92                   (ii) $1.00   (iv) $0.82 2. Draw the relevant diagrams for a typical farm, and for the market as a whole, when the market for wheat is in long run equilibrium. Assume the farm faces perfect completion. (hint, make sure to include Demand, MC, MR and AC on the firms graph based on what we learned about perfect competitors and show the profit maximizing quantity (you will not be able to calculate but show it on the graph) for that farmer). Show the market equilibrium at $3.50/bushel and 1200 thousand bushels of wheat. 3. Xander Harris is considering whether to buy a corn and soybean farm in Iowa. The farm will cost $800,000, and Xander will be able to pay this from profits his recently deceased mother made on the stock market and willed to him. He estimates that if he does not run the farm, and keeps his current job as an economic forecaster, he will be able to earn $40,000 a year. The prevailing interest rate is 9 percent. Xander’s only motive is to maximize his income.             a)  Should he buy the farm, and become a farmer from an accounting viewpoint if his accountant tells him the annual profit from the farm is likely to be:                   i)    $160,000?                   ii)   $100,000?                   iii) $50,000? b) Since he is currently an economist, Xander decides to recalculate the profit figures in a) according to the logic used by economists rather than accountants. What profit fig.

1. Micro Economics Take Home portion of the final Exam
Chapter 10
1.
Farmer Dorr figures that her fixed costs are $2,000, and the
relevant portion of her total cost curve is:
Thousands of Total
Cost
Bushels (in thousands of dollars)
10
10.70
11
11.45
12
12.25
13
13.10
14
14.00
15
15.00
16
16.10
17
17.32
18
18.75
19
20.30
a) Calculate Farmer Dorr’s schedules of average cost,
marginal cost, total variable cost, and average variable cost.

2. b) If Farmer Dorr is a perfect competitor, what level of
output should she produce, if the market price is:
(i) $1.50 (iii) $0.92
(ii) $1.00 (iv) $0.82
2.
Draw the relevant diagrams for a typical farm, and for the
market as a whole, when the market for wheat is in long run
equilibrium. Assume the farm faces perfect completion. (hint,
make sure to include Demand, MC, MR and AC on the firms
graph based on what we learned about perfect competitors and
show the profit maximizing quantity (you will not be able to
calculate but show it on the graph) for that farmer). Show the
market equilibrium at $3.50/bushel and 1200 thousand bushels
of wheat.
3.
Xander Harris is considering whether to buy a corn and soybean
farm in Iowa. The farm will cost $800,000, and Xander will be
able to pay this from profits his recently deceased mother made
on the stock market and willed to him. He estimates that if he
does not run the farm, and keeps his current job as an economic
forecaster, he will be able to earn $40,000 a year. The
prevailing interest rate is 9 percent. Xander’s only motive is to
maximize his income.
a) Should he buy the farm, and become a farmer from
an accounting viewpoint if his accountant tells him the annual
profit from the farm is likely to be:
i) $160,000?
ii) $100,000?
iii) $50,000?
b)
Since he is currently an economist, Xander decides to

3. recalculate the profit figures in a) according to the logic used
by economists rather than accountants. What profit figures does
he come up with? Do these new figures cause him to change his
mind about becoming a farmer?
4.
What examples of perfectly competitive markets can you think
of in the economy?
a-The most common example used for perfect competition is
agriculture.
While agriculture does not fit these assumptions perfectly, it
comes closer to perfect competition than to any other market
structure.
Other
example, areas suitable to growing corn are generally also very
suitable to grow soybeans. Similar equipment is used to plant,
cultivate and harvest corn and soybeans. If corn prices have
been low, corn farmers could easily switch to growing soybeans
the next year
example, there are a limited number of meat processors that
handle pork and poultry reducing the competition on the buying
side of the market. In time, we may have to adjust our
interpretation of at least some of the agricultural markets, but
for the moment the best fit still appears to be perfect
competition.
5.
The text states that four conditions are necessary for the
existence of a perfectly competitive market.
Discuss
in your own words each one.
a) Numerous participants: Roughly how many sellers
do you think are needed to make a market perfectly
competitive?

4. b) Homogeneity of product: How would perfect
competition be altered if buyers could distinguish between the
products of different producers?
c) Freedom of entry and exit: How might this
condition be violated? What sorts of barriers to entry or exit
might exist?
d) Perfect information: What exactly needs to be
known, and by whom, in order to make competition perfect?
Chapter 11
6.
Slash and Burn is a monopolist that can sell its output at these
prices and with these total costs:
Output Price Total Cost
4 $27
$28
5 26
34
6 25
42
7 24
52
8 23
64
9 22
88
10 21
105
11 20
125
12 19

5. 148
13 18
174
14 17
204
a) What level of output will Slash and Burn choose to
produce? What will the selling price and profit be?
b) Suppose that Slash and Burn produced at the level
that a perfectly competitive industry would, with marginal cost
equal to price. What would be the output, price and profit?
7.
Explain why it is incorrect to speak of a monopolist’s supply
curve.
It doesn't make sense to talk about a monopolist's supply curve.
Notice that a supply curve shows us how much output a firm
will produce under any given market price.
• But this concept doesn’t make sense in relation to a
monopolist who sets a price, rather than taking it from the
market as given.
Chapter 12
8.
In the beach city of Santa Barbara, California, there are seven
bathing suit stores, each with the same schedule of costs and
each facing an identical demand curve. Swim N Style is a
typical store:
Suits sold
(per hour) Price Total Cost
TR MR AC
1 $68

6. $70
2 66
80
3 64
85
4 62
90
5 60
100
6 58
115
7 56
136
8 54
164
9 52
200
10 50
245
a) Calculate
total revenue
,
marginal revenue
,
marginal cost
and
average cost
at each level of sales for the store.
b) If Swim N Style is a profit maximizer, what number
of suits will it sell per hour? What will its price and profit be?
9.
Seventeen new bathing suit stores enter the Santa Barbara
market, joining the seven that already existed. As a

7. consequence, the demand schedule facing Swim N Style (and all
other stores) falls, while the cost schedules remain constant as
in Problem 1:
Suits sold
(per hour) Price
1 $31.50
2 28.50
3 25.50
4 22.50
5 19.50
6 16.50
7 13.50
8 10.50
9 7.50
10 4.50
a) What number of suits will Swim N Style sell now?
b) What price will it charge, and what will its profit
be?
c) What is the average cost per swimsuit sold?
d) How many swimsuits are sold in Santa Barbara each
hour, and what is the total cost incurred?
e) From your calculations in Problem 1, identify the
sales level at which Swim N Style’s average cost would be a
minimum. What is this average cost?
f) Summarize briefly what you have learned from this
problem about the efficiency of monopolistic competition
10.
Gas Guzzler Motors is one of three major auto producers. It is
currently producing 6,000 cars a day, and selling them at a price
of $10,000 each. Its marketing department tells it that its
demand curve depends critically upon whether its competitors

8. match its price changes. If they do not change their prices when
GG does, schedule l will apply; if they match GG’s price
changes, schedule 2 will apply. The schedules are as follows:
Cars Schedule 1 Schedule
2
(in 000s) Price per car Price per car
1 $12,500
$15,000
2 12,000
14,000
3 11,500
13,000
4 11,000
12,000
5 10,500
11,000
6 10,000
10,000
7 9,500
9,000
8 9,000
8,000
9 8,500
7,000
10 8,000
6,000
a) Calculate the marginal revenue (for increments of
thousands of cars) associated with each demand schedule.
b) Draw the two demand and MR curves on graph
paper.
c) Assume now that, if GG raises its price, its
competitors will not raise theirs, but that, if it lowers it price,
they will match the price cuts. On the graph paper, show the
effective demand curve and marginal revenue curve that face

9. GG.
11.
Three oligopolists, A, B and C, produce an identical product, Q.
Q is produced under conditions of constant costs, that is, AC =
MC = $100. The market demand schedule for Q is:
Price Quantity Demanded
$1,000 0
950 25
900 50
850 75
800 100
750 125
700 150
650 175
600 200
550 225
500 250
450 275
400 300
a) A, B, and C decide to act illegally as a cartel, to
divide the market equally among the three of them, and to set
the price and output that will maximize their total profits. What
price and output do they set? What is the output level that each
of the firms agrees to? What profit is earned by each firm and
by the three firms together?
b) A is impressed with the honesty of B and C, and
believes they will keep to their agreements. They do, and A
cheats by increasing output by 25 units. What is the new market
price? How have the profit levels of A, B, and C changed? How
have total profits in the industry changed?
c) What actions are B and C likely to take in
retaliation? Show how these actions will affect the market price,

10. and the profit levels of the three firms.
d) What can you learn from this problem about the
likely stability of a cartel?
Chapter 20
12.
The employees at Warren Manufacturing Company are
unionized. As minimum requirements, the union members insist
on keeping a work force of at least 300 workers, and accepting
an hourly wage rate of no less than $8. Beyond those minimum
requirements, however, they are considering some different
economic goals. Calculated on an hourly basis, the employees’
marginal revenue product schedule is:
Employees MRP
100 $20
200 18
300 16
400 14
450 13
500 12
550 11
600 10
650 9
700 8
800 6
900 4
a) If the union attempts to maximize the wage rate of
its employees, subject to the above constraints, what wage rate
and employment level can it expect to achieve?
b) If the union attempts to maximize the employment
of its members at Warren, what wage rate and employment level
can it expect to achieve?
13.

11. Using supply and demand diagrams, plus explanations of why
you have drawn the supply and demand curves the way you
have, explain why, in most cases.
a) Garbage collectors earn more than musicians do.
b) Engineers earn more than elementary school
teachers do.
c) Computer software programmers earn more than
migrant field workers do.
d) College graduates earn more than high school
dropouts do.
14.
How much choice do you expect to have in your working
lifetime between leisure and labor? What factors will influence
your choice?
Chapter 21
15.
To analyze the effects of discrimination in labor markets, use
supply and demand curves for labor, with the demand curves
representing the value of the marginal product, show the effects
of discrimination on wage rates and explain what would happen
in the marker over time.
Condition: Acme and United are two identical firms. Acme
refuses to hire blacks, while United treats all job applicants
equally.
Need Graph