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Answer all the 8 questions (10 marks each) and briefly explain your answers.

(Products and workers are assumed divisible)


1. Bob has $200 to spend on ice-cream and cake. The graph below shows his preference map
and best affordable choice.
cake

12

ice-cream

(a) What are the prices of ice-cream and cake?


(b) What will be his new choice, substitution effect, and income effect if the price of icecream is changed to $5?
(c) Will he feel better, same, or worse if the prices of ice-cream and cake are both changed to
$12.5?

2. The table below shows the total product of a firm:


Number
Total
Marginal
Average
Total
of
Product
Product
Product
(Variable)
workers
Cost
0
0
1

20

50

75

94

105

Marginal
Cost

Average
(Variable)
Cost

(a) Let the labor cost be $10 per worker. Complete the table above (fill the underlined cells
only).
(b) Draw the marginal product curve and average product curve in one graph.
(c) Draw the marginal cost curve and the average (variable) cost curve in one graph.

3. The table below shows the total cost of a firm:


Output 0
1
2
TC
100
130
150
MC
AVC

3
160

4
190

(a) Complete the table above (fill the underlined cells only).
(b) Find the output, profit, and producer surplus if the market price is
(i) $40
(ii) $60
(c) Draw the SR supply curve of this firm.

5
240

6
310

4. In a competitive market each firm can choose one of three short run production methods to
produce output. The graph below shows the marginal cost curves and the average total cost
curves of the three production methods.
(a) Draw the long run average cost curve and the long run marginal cost curve on the graph
below.
(b) What are the price, output, and number of firms in the long run if the market demand is
Q=3400100P?

MC1
ATC1

cost

MC2

MC3

ATC2

ATC3

14
10
8

15

40

55

5. A good is produced and sold by a monopolist. The table below shows the market demand
for the good at different prices and the corresponding cost of production.
price
18 16.5 15 13.5 12 10.5 9
7.5
6
4.5
3
1.5
0
quantity 0
1
2
3
4
5
6
7
8
9
10 11
12
TC
20 20.75 23 26.75 32 38.75 47 56.75 68 80.75 95 110.75 128
(a) Complete the table below:
quantity 3
3.5
4
4.5
5
5.5
6
6.5
7
MR
MC
(b) Find the price, output, profit, consumer surplus, and dead weight loss.

6. There are 200 identical firms in a competitive market. The marginal cost of each firm is
MC=q. The market demand is Q=3000100P.
(a) Find the market equilibrium, consumer surplus, producer surplus, and dead weight loss.
(b) Find the market equilibrium, consumer surplus, producer surplus, and dead weight loss if
all firms merge.

7. A monopolistically competitive market is currently in long run equilibrium. Graph the short
run and long run changes of firm ABC, one of many firms in this market, if the government
lowers the lump-sum tax imposed on firms in this market.

8. There are 2 firms in an oligopoly market: firm ABC and firm XYZ. They simultaneously
decide whether to spend on advertising. If both firms spend on advertising, the profit of each
will be 80. If both firms do not spend on advertising, the profit of each will be 100. If only
one firm spends on advertising, the firm with advertising earns 150 and the firm without
advertising earns 30.
(a) Construct the payoff matrix for this problem.
(b) Are there dominant strategies for the two firms?
(c) Find all the possible equilibria of this problem.

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