ECON 200 Final Ellis Winter 2010
ECON 200 Final Ellis Winter 2010 ECON200
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Date Created: 04/23/16
Professor Ellis Economics 200 Final Examination Winter 2010 Please answer all questions and write legibly. You must explain your answers. 1. The Law of Diminishing Returns (20 points) th During the 14 century, the Bubonic Plague reduced the population of England by one- third in three years. Historians report that afterwards, the prices of goods rose, but wages (incomes) of the survivors rose even more, resulting in higher real incomes for the survivors. Incidentally, the medium of exchange at the time was mainly metal coin, and the stock of metal coin was approximately the same before and after the plague. a) What effect did the plague have on total (not per capita) output in England? b) Explain why the prices of goods would be expected to rise? c) Only humans caught the plague. Using the law of diminishing returns, explain why real incomes would increase. 2. Nonrenewable Resource Extraction (10 points) The quantity demanded of an exhaustible resource is a function of its price in time periods 1 and 2: Q t t16 , t=1,2. Inverse demand is therefore P tt16 . Assume that marginal extraction cost is a cons_ant $4, the rate of discount 50%, and the total available reserves of the resource are Q 9. What are the dynamically efficient levels of extraction Q 1nd Q . 2 3. Input Demand (30 points) Kaiser’s produces fruit smoothies. The market for smoothies is perfectly competitive, and the price is $4 a smoothie. The labor market is competitive, and the wage rate is $40 per day. The following table shows relationship between the amount of labor, L, employed, and the quantity, Q, of smoothies produced each day: L1 2 3 4 5 6 Q 7 21 33 43 51 55 a. Calculate the marginal product and the value of the marginal product for labor. b. How many workers will Kaiser hire to maximize its profit and how many smoothies per day will Kaiser’s produce? c. Kaiser’s installs a machine that increases the productivity of workers by 50%. If the price remains at $4 per smoothie, but the wage rises to $48 a day, how many workers does Kaiser’s hire? 4. Coase Theorem (10 points) What is the Coase Theorem? What assumption must be satisfied for the Coase Theorem to be applicable in resolving externality problems? 5. Imperfect Market Structures (30 points) For the following questions, assume the good in question is homogeneous, and that the market demand function is Q P250.25 ; the market inverse demand function is thereforeP Q100 4 . a) Monopoly i) Find the profit-maximizing output level for a monopolist with constant marginal costs of $20 (assume that fixed costs are zero so that total cost is giveC() 2 Q ). The marginal revenue function for the monopolist isMR 1008Q . ii) Calculate the deadweight loss to monopoly. b) Duopoly i) Suppose there are two firms in the industry, each with constant marginal costs equal to $20 and no capacity constraints. Suppose further that the two firms will compete against each other just once in this market. In answering the following question, assume that a firm with a lower price than its rival will capture the entire market demand. If, in equilibrium, the two firms charge the same price, assume that they split evenly the market demand at that price. If the two firms simultaneously choose price to maximize their respective profits, what will be the Nash equilibrium (i.e., what prices will they each charge)? What will be the level of each firm’s profits? ii) Would your answer regarding the duopoly equilibrium change if each firm could produce at most 15 units of output? Why or why not?
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