University Of Manitoba Econ 2010 Take-Home Midterm Exam
The University Of Manitoba Econ 2010take Home Midterm Examinatio
The provided document is an exam consisting of multiple questions related to microeconomic concepts, demand analysis, consumer surplus, producer behavior, isoquant and iso-cost analysis, market equilibrium, government intervention effects, industry analysis, and true/false conceptual questions. The exam emphasizes the importance of explanations in responses and specifies that the work should be individual and non-collaborative. It includes instructions on submission procedures and academic integrity standards.
Paper For Above instruction
This paper provides comprehensive answers to each question from the given examinee instructions. The responses aim to demonstrate clear understanding of fundamental microeconomic principles, including demand elasticity, consumer surplus, marginal cost analysis, isoquants and iso-cost lines, market equilibrium, government interventions, industry supply and demand, and the distinctions between short-run and long-run industry behaviors. Each answer includes theoretical explanations, relevant diagrams, and application to hypothetical scenarios, as appropriate.
Question 1: Demand Diagram for Gadgets and Widgets
The demand curves for gadgets and widgets are both downward-sloping straight lines at a market price of $10, with 30 units purchased of each. Given that the demand for gadgets is much more elastic than that for widgets, the demand for gadgets can be depicted as a flatter slope compared to the steeper demand curve for widgets. The increased elasticity implies that a small change in price leads to a larger change in quantity demanded for gadgets than for widgets. In the demand diagram, this is visually conveyed by the flatter slope of the gadgets' demand curve in comparison with the steeper widgets' demand curve, both passing through the points where quantity demanded is 30 units at a $10 price.
Question 2: Consumer Surplus Calculation
Consumer surplus reflects the difference between what consumers are willing to pay and what they actually pay. Under linear demand curves, it is given by the area of the triangle between the demand curve and the market price. Due to the higher elasticity, gadgets' demand curve extends further in terms of potential consumer willingness to pay, resulting in a larger consumer surplus for gadgets, assuming the maximum price consumers are willing to pay is higher than $10. Conversely, widgets, with a more inelastic demand, have a smaller consumer surplus. Thus, gadgets provide the highest consumer surplus due to their more elastic demand.
Question 3: Choice of Extra Good Under Duress
If forced to buy an additional gadget or widget, the consumer's decision depends on marginal utility and price considerations. Since both are priced equally at $10, but demand for gadgets is more elastic, the consumer might prefer to buy the gadget to maximize marginal utility, or alternatively, depending on utility curves, may prefer the less elastic good, widgets, to minimize additional expenditure. However, considering marginal utility per dollar, consumers choose the good where the marginal utility per dollar is higher; if gadgets provide higher utility, the consumer should buy an extra gadget.
Question 4: Change in Consumer Surplus Due to Forced Purchase
A forced purchase at $10 reduces consumer surplus by the amount equal to the difference between their willingness to pay and the market price, across the quantity bought. Graphically, this results in a decline in the triangle of consumer surplus. The exact reduction depends on the initial demand curve but generally manifests as a loss of consumer surplus equal to the area of the triangle between the demand curve and the market price over the quantity purchased due to the forced transaction.
Question 5: Slope of the Isoquant and Its Interpretation
Given MRTSₖₗ = 2, Pₗ = 3, Pk = 1, the slope of the isoquant, which equals the marginal rate of technical substitution, is 2. This indicates the rate at which the firm can substitute labor for capital while maintaining the same output level. The value 2 implies the firm is willing to give up 2 units of labor for 1 unit of capital, reflecting the productivity trade-off between inputs.
Question 6: Slope of the Iso-cost Line and Its Interpretation
The slope of the iso-cost line is given by –Pₗ / Pₖ = –3/1 = –3. This represents the rate at which the firm can trade off labor for capital given input prices. The steepness reflects the relative cost of inputs; a slope of –3 indicates that one unit of capital costs three times as much as one unit of labor, emphasizing the cost efficiency considerations for input selection.
Question 7: Output Maximization Given Expenditure Constraints
Since the MRTS (2) is less than the ratio of input prices (3/1), the firm is not maximizing output because it can increase output by reallocating inputs without changing total expenditure—specifically, substituting labor for capital, which would yield higher output per cost unit, until the MRTS equals the input price ratio. Adjusting input proportions along the isoquant to match the input price ratio maximizes output for the given total expenditure.
Question 8: Diagram of Firm's Input Choices and Path
In a graph with labor on the horizontal axis and capital on the vertical axis, point A represents current input combination. The isoquant curve passing through A reflects the firm's current output level. The iso-cost line tangential to the isoquant at A indicates the current cost combination. The expansion path shows the path of cost-minimizing input combinations as output expands, typically a straight line connecting the tangency points for various output levels. It demonstrates the optimal input combination as output grows.
Question 9: Diagram with Key Points and Curves
On the same diagram, point B is the intersection of the expansion path with the iso-cost line, indicating the cost-minimizing input combination at a particular output level. Point C is where the expansion path intersects the isoquant through A, illustrating the output level associated with the initial input combination. The isoquant passing through B indicates the output level at that input mix, and the iso-cost curve passing through C reflects the corresponding cost. These intersections visualize the firm's optimal production and cost decisions.
Question 10: American Orange Market Price and Seller's Revenue
With domestic demand and supply crossing at $8, but global market price at $5, Americans can buy or sell oranges at the world price of $5. Assuming they purchase at the lower world price, Americans pay $5 per orange; however, domestic producers, who would prefer to sell at $8, only receive $5 on the world market. Thus, consumers pay $5, and producers effectively receive $5, which is less than the domestic equilibrium price, indicating a loss of potential domestic gains.
Question 11: Consumer Surplus, Producer Surplus, Total Surplus
At the world price of $5, consumer surplus increases compared to the domestic equilibrium price, as consumers buy more at a lower price. Producer surplus decreases, as domestic producers receive less than they would at $8. The total surplus, sum of consumer and producer surplus, is affected, with a net loss compared to the free market scenario, depending on the area of the deadweight loss created by the price difference.
Question 12: Effect of Government Purchase at $6
Now, with the government paying $6 per orange and purchasing all means the government then resells at $5, leading to a price wedge. This intervention shifts the effective price for consumers to $6 for those oranges bought by the government and affects the supply-demand equilibrium. Consumers pay $5 on the open market, but the government’s purchase at $6 may provide compensation or subsidies to producers, modifying the prior surplus calculations.
Question 13: Deadweight Loss Illustration
The deadweight loss appears as the triangular area between the demand and supply curves, corresponding to the quantity of oranges not traded due to the imposed price floors and market intervention. Graphically, this is shown as the reduction in total surplus arising from market distortions caused by the government intervention, representing lost gains from trade.
Question 14: Widget Industry Price
In long-run equilibrium for a constant cost industry with 50 identical firms, the market price equals the minimum of the firm's long-run average cost, which equals their marginal cost at equilibrium. Given the industry is in long-run equilibrium with constant costs, the price of a widget is equal to the minimum average cost, typically provided by the intersection of the industry demand and the firms' supply curve; assuming the previous data, this price is a stable long-run equilibrium price, often at the level of the marginal cost curve, which could be inferred from the data provided.
Question 15: Fixed Costs of Each Firm
In long-run equilibrium, fixed costs are sunk costs that do not affect decisions on entry or exit. Since firms break even at the minimum point of their average total costs, any fixed costs are recovered through revenues at this point. Without specific numerical details, fixed costs are the total costs minus variable costs at equilibrium output, which are not explicitly provided but typically correspond to the fixed cost component that is spread over the output.
Question 16: Short-Run Supply Quantity at $8
At a given price of $8, the short-run industry supply quantity is determined by summing the individual firm's short-run supply quantities, which correspond to the portion of their marginal cost curves that are above the average variable cost curve, as well as the number of firms in the industry (50). The exact quantity can be inferred from the marginal cost curve data, but qualitatively, it is the output level where industry supply intersects the $8 price level.
Question 17: True/False Explanation Regarding Insurance Costs
True. If there is only one department store, the insurance cost is a fixed expense for that store alone and is unlikely to be directly passed on to consumers. However, with multiple stores, competitive pressure may prevent the store from absorbing increased costs and instead pass some or all of those costs to consumers through higher prices, illustrating the competitive dynamics and cost transmission.
Question 18: True/False About Long-Run Equilibrium Profits
True. In perfect competition, long-run equilibrium occurs when firms earn zero economic profit; any positive profit attracts new entrants, driving profits down, until all firms break even at the minimum of their average total costs.