Quiz Two Name__________________

PPA 723, Fall 2002

Professor John McPeak

November 5, 2002

Total quiz is worth 20 points, each numbered question is worth 2 points, and each sub question (the a / b / c / d parts) are worth equal shares of the two points.

1) Fill out the following table (circle appropriate answer or fill in blank)

	Monopoly	Oligopoly	Perfect Competition
Profit is maximized by choosing a quantity such that marginal cost equals what?
Is the firm a price taker?	Yes No	Yes No	Yes No
Are there barriers to entry?	Yes No	Yes No	Yes No
Are there strategic interactions?	Yes No	Yes No	Yes No
Is long run economic profit potentially greater than zero?	Yes No	Yes No	Yes No
# of firms	One Few Many	One Few Many	One Few Many

2) Circle the elements of the minimum set of information you need to identify quantities that satisfy the condition. Quantities in this sense are both input quantities and output quantity. If you do not need a particular type of information to identify quantities satisfying that condition, do not circle that type of information.

Condition	Information Components
Technical Efficiency	Production Function Input Costs Output Market Structure Output selling Price Consumer Surplus Outcome of Florida Election
Economic Efficiency	Production Function Input Costs Output Market Structure Output selling Price Consumer Surplus Outcome of Florida Election
Profit Maximization	Production Function Input Costs Output Market Structure Output selling Price Consumer Surplus Outcome of Florida Election

3) Complete the following table.

Output	Fixed Cost	Total Cost	Variable Cost	Marginal Cost	Average Cost	Average Variable Cost
0	15	15	NA	NA	NA	NA
1		26
2		36
3		48
4		61
5		75
6		90
7		106
8		125

(NA means not applicable)

a) Is this a short run or long run information on cost? Why?

b) If the selling price of the good produced is currently 12, what level of output is the profit maximizing level?

c) Should the firm produce at this level, or should it shut down? Why?

d) Draw the average cost, the average variable cost, and the marginal cost curves based on the information in this table. Show where the selling price lies in relation to these curves.

4) For a given isoquant, the marginal product of capital is 8, and we know that when capital increases by 1 and the corresponding decrease in labor is 4.

a. What is the marginal product of labor at this point on the isoquant?

b. What is the marginal rate of technical substitution?

c. If the rental rate of capital is 4 and the wage rate for labor is 3, is the original point where MPK = 8 and MPL=your result in (a) a cost minimizing point? Why or why not?

5) You know that the inverse demand curve is defined by the following function: P=25-Q and costs are defined by 5*Q (so you know MC is 5 for all possible levels of Q).

a. Use the bisection rule to define the marginal revenue curve

b. What level should the monopolist produce at?

c. What is the implied price?

d. What is the implied profit?

6) Continue with the information in question five, so you are still working with the information that P=25-Q, and MC =5.

a. If this were to become a perfectly competitive market for some reason, what would the market price and quantity in the market be if all firms had identical cost structures to the monopoly firm and the demand curve was unchanged?

b. Show the competitive case in comparison to the monopoly case on a single graph. Show consumer surplus and producer surplus on this graph. Calculate the area of consumer surplus and producer surplus under the competitive and the monopoly structure. Indicate on the graph the area corresponding to dead weight loss, and calculate its value in this example.

7) Distinguish between monopsony and monopoly.

a. Define a monopsony, and describe a real world example of such a firm.

b. Draw a graph that shows how a monopsony firm chooses a price quantity pair for the market over which it has market power.

c. Define a monopoly and describe a real world example of such a firm.

d. Draw a graph that shows how a monopoly firm chooses a price-quantity pair for the market over which it has market power.

8) Describe the expansion path.

a. Define the expansion path.

b. Illustrate on a graph how the expansion path is derived.

c. Are there points on the expansion path that are technically efficient but are not economically efficient? Why or why not?

d. Can we identify a profit maximization point based on the information contained in the expansion path? Why or why not?

9) Cost concepts.

a. What are the seven short-run cost concepts, and how are they defined?

b. What are the long-run cost concepts, and how are they defined?

c. Why are there fewer long-run cost concepts than short run cost concepts?

10) Binghamton has the “Broome County Regional” and Ithaca has “Tompkins County Regional” airport. Currently, Broome County gets $30,000 per day from running their own airport, while Tompkins County gets $50,000 per day (these are net of all possible considerations). Under state guidance, a new regional airport will be constructed if each municipality agrees to close their own airport. If they do agree to close their airport, they will evenly split the profit generate of the jointly managed “Southern-Tier Regional Airport”, which is estimated to be $120,000 per day. If Broome County closes its airport, but Tompkins County does not, it is estimated that Broome County will earn $0 per day, while Tompkins will earn $75,000 per day. If Tompkins county closes its airport, but Broome county does not, Broome county is estimated to earn $70,000 per day, and Tompkins county earns $0 per day. In normal form, this can be written as follows.

	Broome County
Tompkins County		Close (BC)	Don’t Close (BC)
	Close (TC)	$60, $60	$0, $70
	Don’t Close (TC)	$75, $0	$50, $30

Payoffs are in thousands of dollars.

a) Describe the full set of best response strategies for each county in turn.

b) Will the regional airport be built if each firm plays their own best response strategy?