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EMA Microeconomics

Sample Final Exam

Multiple Choices: There are 15 questions and each question is worth 1 points. Please select one and
only one answer and circle the letter of your answer.
1. A manager cares about the total labor cost and wants it to be minimized. She can
choose between two projects: Project A allows her to hire workers who must be paid WA
each, Project B allows her to hire workers who must be paid WB each. She has to
achieve a total profit of $100,000 by choosing either or both projects. In this constraint
optimization problem, which of the four following statements is true?
A. The objective function is Min (WANA + WBNB), where Ni is the number of workers on
project i (i = A, B).
B. The objective function is Max (WAN + WBN), where N is the number of workers and Wi is
the wage of the worker on project i (i = A, B).
C. The objective function is Min (NA + NB), where Ni is the number of workers on project i (i
= A, B).
D. The constraint is (WA + WB = $100,000).
2. If the interest rate is five percent, the present value of $200 received at the end of five
years is:
A. $121.34.
B. $156.71.
C. $176.41.
D. $132.62.
3. Suppose that Debbie and Joe are the only two individuals in the market for ski
equipments. Their demand curves are, respectively, P = 5 QDebbie/4 and P = 3 QJoe.
Which of the following gives the expression for market demand if price is above $5?
A. Qm = 0
B. P = 8 5Qm/4
C. Qm = 23 5P
D. Cannot be determined from the given information

EMA Microeconomics

Sample Final Exam

4. Erins utility function is given by U(x,y) = xy. Suppose her income is I, price of x is Px
and price of y is Py what are the expressions for the demand curves for x?
A. x = 0
B. x = I/Px
C. x = I/(2Px)
D. Cannot be determined from the information given.
5. An electronic company purchases a food company. This is an example of:
A. vertical integration.
B. horizontal integration.
C. cointegration.
D. conglomerate integration.
6. The industry elasticity of demand for telephone service is -2 while the elasticity of
demand for a specific phone company is -5. What is the Rothchild index?
A. 0.2.
B. 0.4.
C. 0.5.
D. 0.7.
7. An industry consists of six firms with annual sales of $300, $500, $400, $700, $600, and
$600, respectively. What is the industry's C4?
A. 0.58.
B. 0.62.
C. 0.74.
D. 0.77.
8. An industry consists of six firms with annual sales of $300, $500, $400, $700, $600, and
$600, respectively. What is the industry's HHI?
A. 1,659.
B. 1,779.
C. 1,839.
D. 1,909.

EMA Microeconomics

Sample Final Exam

9. In a competitive industry with identical firms, long run equilibrium is characterized by


A. P = AC.
B. P = MC.
C. MR = MC.
D. All of the statements associated with this question are correct.
10. Suppose that a monopolistically competitive market is at the long-run equilibrium.
Based on this information which of the following conclusion is NOT true?
A. P > MC.
B. Deadweight loss is zero.
C. P = ATC > minimum of ATC.
D. Firms' profits are zero.
11. Which of the following is true?
A. In Bertrand oligopoly each firm believes that their rivals will hold their output constant if it
changes its output.
B. In Cournot oligopoly firms produce an identical product at a constant marginal cost and
engage in price competition.
C. In oligopoly a change in marginal cost never has an affect on output or price.
D. None of the statements associated with this question are true.
12. Which of the following is not a feature of Sweezy oligopoly?
A. There are two firms in the market serving many consumers.
B. The firms produce homogenous products.
C. Each firm believes that rivals will cut their prices in response to a price reduction, but will not
raise their prices in response to a price increase.
D. Barriers to entry exist.
13. An important condition for a contestable market is:
A. all producers have different technologies.
B. there are high transaction costs.
C. existing firms cannot respond quickly to entry by lowering their price.
D. there are sunk costs.

EMA Microeconomics

Sample Final Exam

14. Long-term contracts become longer


A. when specialized investment becomes more important.
B. when the exchange environment is more complex.
C. spot markets work well.
D. marginal costs are declining.
15. Which of the following is an external incentive that forces managers to put forth
maximal effort?
A. Incentive contracts.
B. Performance bonuses.
C. Flat fees.
D. Reputation.

EMA Microeconomics

Sample Final Exam

Short Answer Questions: Point values for each question are indicated at the end of each question.
1. (12 points)
A homogeneous product duopoly faces a market demand function given by
P = 300 2Q , where Q = q1 + q2 . Both firms have a constant marginal cost and average

total cost ATC = MC = 100 . These two firms are competing against each other under
Cournot market structure by choosing their optimal ouput.
a. What is Firm 1s profit-maximizing quantity, given that Firm 2 produces an output of
50 units per year?

b. Derive the equation of each firms reaction curve.

c. What is the Cournot equilibrium quantity per firm?

EMA Microeconomics

Sample Final Exam

d. Summarize Cournot equilibrium (market output, market price and individual firms
profit)

e. What would the equilibrium price and quantity in this market be if it were perfectly
competitive?

f. What would the equilibrium price and quantity in this market be if the two firms
colluded to set the monopoly price?

g. Compare the market output and price you calculate from d, e and f. Which market
structure has the highest market output and which market structure has the highest
market price?

EMA Microeconomics

Sample Final Exam

2. (7 points)
A monopolist sells a product with a total cost function TC = 1200 + 0.5Q 2 . The market
demand curve is given by the equation P = 300 Q .
a. Find the profit-maximizing output and price for this monopolist. Calculate the
monopolists profit.

b. Calculate the price elasticity of demand at the monopolists profit-maximizing price.

c. Calculate the marginal cost at the monopolists profit-maximizing output and its
Lerner index.

d. Verify that the IEPR holds.

EMA Microeconomics

Sample Final Exam

3. (6 points)
Explain how each of the following affects the optimal method of acquiring an input.
a. A complex contracting environment.

b. A specialized investment.

c. Opportunism.

d. Bargaining costs.

e. The costs of bureaucracy.

f. Gains from specialization.

EMA Microeconomics

Sample Final Exam

4. (5 points)
The corn chips industry is perfectly competitive, and each producer has the long-run
total cost function TC = 40q 6q + (1/ 3)q . The market demand curve for corn chips
2

is Q = 2200 100 P .
a. What is the long-run equilibrium price in the corn chips industry?

b. At this price, how much would an individual firm produce?

c. How many firms are in the corn chips industry in a long-run competitive
equilibrium?