ECON 3070 INTERMEDIATE
MICROECONOMICS ADDITIONAL
PRACTICE QUESTIONS FOR EXAM 2 FALL
2020
Exam 2 will cover:
•
Lectures 8, 9, 10, 11, 12, 13, 14.
•
Material discussed in the recorded lectures and in the lecture slides.
•
Emphasis will be placed on Lectures 11-14.
•
About 75% of the exam will be on material from Lectures 11-14.
•
About 25% of the exam will be on material from Lectures 8-10.
•
Please review especially examples in lectures, problem sets, and homework
quizzes.
Below are some additional practice questions:
Part 1. Choose the most appropriate answer in each of the following questions.
1. A perfectly competitive industry has 120 firms, and each firm has total cost
TC = 2q2 + 10, which includes FC = 10.
1) What is each firm’s short-run supply function?
2) What is the industry’s short-run supply function?
3) What additional information you may need in order to determine the industry
output that will be produced in equilibrium?
Ans:
1) MC = dTC/dq = 4q. For given price P, each firm’s optimal output satisfies P =
MC, or P = 4q. Thus, each firm’s short-run supply function is q = P/4, for P ≥ 0,
because the AVC = 2q is minimized at q = 0.
2) Q = 120 x (P/4) = 30P, for P ≥ 0.
3) I would need to know the equilibrium industry price, P*, which will enable me to
calculate the equilibrium industry output Q* = 30P*. In order to know P*, we will
need to know the market demand function, and P* is the price under which quantity
, ECON 3070 INTERMEDIATE
MICROECONOMICS ADDITIONAL
PRACTICE QUESTIONS FOR EXAM 2 FALL
2020
demanded equals quantity supplied in the industry.
2. Suppose that a perfectly competitive industry is in long-run equilibrium,
where each firm has the identical total cost function that is independent of the
number of firms that enter the industry:
TC(q) = 200 + 10q + 2q2
a) Briefly explain why in this case the equilibrium market price is determined
entirely by each firm’s cost function, independent of market demand.
b) What is the equilibrium market price?
c) Is this a constant-, increasing-, or decreasing-cost industry?
Ans:
a) Because all firms have the identical cost function, in the long-run
competitive equilibrium each firm will earn zero profit and produce with the
minimum average cost due to the free entry and exit of firms. At the output
where average cost is minimized, AC = MC = P*, independent of market
demand.
b) Because AC = (200 + 10q + 2q2)/q and MC = dTC/dq = 10 + 4q, Setting
(200 + 10q + 2q2)/q = 10 + 4q, we obtain q* = 10, and hence P* = 10 +
4q* = 50.
MICROECONOMICS ADDITIONAL
PRACTICE QUESTIONS FOR EXAM 2 FALL
2020
Exam 2 will cover:
•
Lectures 8, 9, 10, 11, 12, 13, 14.
•
Material discussed in the recorded lectures and in the lecture slides.
•
Emphasis will be placed on Lectures 11-14.
•
About 75% of the exam will be on material from Lectures 11-14.
•
About 25% of the exam will be on material from Lectures 8-10.
•
Please review especially examples in lectures, problem sets, and homework
quizzes.
Below are some additional practice questions:
Part 1. Choose the most appropriate answer in each of the following questions.
1. A perfectly competitive industry has 120 firms, and each firm has total cost
TC = 2q2 + 10, which includes FC = 10.
1) What is each firm’s short-run supply function?
2) What is the industry’s short-run supply function?
3) What additional information you may need in order to determine the industry
output that will be produced in equilibrium?
Ans:
1) MC = dTC/dq = 4q. For given price P, each firm’s optimal output satisfies P =
MC, or P = 4q. Thus, each firm’s short-run supply function is q = P/4, for P ≥ 0,
because the AVC = 2q is minimized at q = 0.
2) Q = 120 x (P/4) = 30P, for P ≥ 0.
3) I would need to know the equilibrium industry price, P*, which will enable me to
calculate the equilibrium industry output Q* = 30P*. In order to know P*, we will
need to know the market demand function, and P* is the price under which quantity
, ECON 3070 INTERMEDIATE
MICROECONOMICS ADDITIONAL
PRACTICE QUESTIONS FOR EXAM 2 FALL
2020
demanded equals quantity supplied in the industry.
2. Suppose that a perfectly competitive industry is in long-run equilibrium,
where each firm has the identical total cost function that is independent of the
number of firms that enter the industry:
TC(q) = 200 + 10q + 2q2
a) Briefly explain why in this case the equilibrium market price is determined
entirely by each firm’s cost function, independent of market demand.
b) What is the equilibrium market price?
c) Is this a constant-, increasing-, or decreasing-cost industry?
Ans:
a) Because all firms have the identical cost function, in the long-run
competitive equilibrium each firm will earn zero profit and produce with the
minimum average cost due to the free entry and exit of firms. At the output
where average cost is minimized, AC = MC = P*, independent of market
demand.
b) Because AC = (200 + 10q + 2q2)/q and MC = dTC/dq = 10 + 4q, Setting
(200 + 10q + 2q2)/q = 10 + 4q, we obtain q* = 10, and hence P* = 10 +
4q* = 50.
