ECO 1023
Microeconomics
EXAM Q & A
2024
,1. Suppose that the demand for pizza is given by Qd = 100 - 2P, where Qd is the
quantity demanded in slices per day and P is the price in dollars per slice. The supply
of pizza is given by Qs = 50 + 4P, where Qs is the quantity supplied in slices per day.
What is the equilibrium price and quantity of pizza in this market?
a) P = $5, Q = 70
b) P = $10, Q = 40
c) P = $7.5, Q = 55
d) P = $12.5, Q = 25
Answer: c) P = $7.5, Q = 55
Rationale: The equilibrium occurs where Qd = Qs, so we can set the two equations
equal to each other and solve for P: 100 - 2P = 50 + 4P, which implies P = $7.5. Then
we can plug this value into either equation to get Q: Qd = 100 - 2(7.5) = 55 or Qs = 50
+ 4(7.5) = 55.
2. Consider a market with two firms, A and B, that produce a homogeneous good. The
inverse demand function for the good is P = 120 - Q, where P is the price in dollars per
unit and Q is the total quantity in units. The marginal cost of production for each firm is
constant and equal to $20 per unit. Assume that the firms compete as Cournot
duopolists, i.e., they choose their quantities simultaneously and independently. What is
the profit-maximizing quantity for firm A?
a) QA = 20
b) QA = 25
c) QA = 30
d) QA = 35
Answer: b) QA = 25
Rationale: The profit function for firm A is given by πA = (P - MC)QA = (120 - QA - QB -
20)QA, where QB is the quantity chosen by firm B. To maximize profit, firm A sets its
marginal revenue equal to its marginal cost: MR = MC, which implies (120 - 2QA - QB)
= 20, or QA = 50 - (1/2)QB. Similarly, the profit-maximizing condition for firm B is QB =
50 - (1/2)QA. Solving these two equations simultaneously gives QA = QB = 25.
3. Suppose that a monopolist faces a linear inverse demand function P(Q) = a - bQ,
where P is the price in dollars per unit and Q is the quantity in units. The monopolist
has a constant marginal cost of c dollars per unit and no fixed cost. What is the
deadweight loss caused by the monopoly pricing compared to the socially optimal
pricing?
a) DWL = (a - c)^2 / (8b)
b) DWL = (a - c)^2 / (4b)
c) DWL = (a - c)^2 / (2b)
d) DWL = (a - c)^2 / b
Answer: a) DWL = (a - c)^2 / (8b)
Rationale: The monopoly quantity is determined by setting marginal revenue equal to
marginal cost: MR(Q) = MC(Q), which implies a - 2bQ = c, or QM = (a - c) / (2b). The
monopoly price is then PM = a - bQM = a - b(a - c) / (2b) =
(a + c) / 2. The socially optimal quantity is determined by setting price equal to
marginal cost: P(Q) =
MC(Q), which implies a - bQ* = c, or Q* =
(a - c) / b. The socially optimal price is then P* =
, c. The deadweight loss is the area of the triangle between the demand curve and the
marginal cost curve from QM to Q*, which is DWL =
(1/2)(Q* -
QM)(PM -
P*) =
(1/2)((a -
c)/b -
(a -
c)/(2b))((a +
c)/2 -
c)=
(a -
c)^2 /
(8b).
B:
1. An example of a barrier to entry is
A. high profits.
B. superior technological knowledge.
This is the correct answer.
C. increasing marginal costs.
Your answer is not correct.
D. product differentiation.
2. Producing where marginal revenue equals marginal cost is equivalent to producing where
A. average total cost equals average revenue.
B. total profit is maximized.
Your answer is correct.
C. total revenue is equal to total cost.
D. average fixed cost is minimized.
3. Academic book publishers hire editors, designers, and production and marketing managers
who help prepare books for publication. Because these employees work on several books
simultaneously, the number of people the company hires will not go up and down with the
quantity of books the company publishes during any particular year. The salaries and benefits of
people in these job categories will be included in
Microeconomics
EXAM Q & A
2024
,1. Suppose that the demand for pizza is given by Qd = 100 - 2P, where Qd is the
quantity demanded in slices per day and P is the price in dollars per slice. The supply
of pizza is given by Qs = 50 + 4P, where Qs is the quantity supplied in slices per day.
What is the equilibrium price and quantity of pizza in this market?
a) P = $5, Q = 70
b) P = $10, Q = 40
c) P = $7.5, Q = 55
d) P = $12.5, Q = 25
Answer: c) P = $7.5, Q = 55
Rationale: The equilibrium occurs where Qd = Qs, so we can set the two equations
equal to each other and solve for P: 100 - 2P = 50 + 4P, which implies P = $7.5. Then
we can plug this value into either equation to get Q: Qd = 100 - 2(7.5) = 55 or Qs = 50
+ 4(7.5) = 55.
2. Consider a market with two firms, A and B, that produce a homogeneous good. The
inverse demand function for the good is P = 120 - Q, where P is the price in dollars per
unit and Q is the total quantity in units. The marginal cost of production for each firm is
constant and equal to $20 per unit. Assume that the firms compete as Cournot
duopolists, i.e., they choose their quantities simultaneously and independently. What is
the profit-maximizing quantity for firm A?
a) QA = 20
b) QA = 25
c) QA = 30
d) QA = 35
Answer: b) QA = 25
Rationale: The profit function for firm A is given by πA = (P - MC)QA = (120 - QA - QB -
20)QA, where QB is the quantity chosen by firm B. To maximize profit, firm A sets its
marginal revenue equal to its marginal cost: MR = MC, which implies (120 - 2QA - QB)
= 20, or QA = 50 - (1/2)QB. Similarly, the profit-maximizing condition for firm B is QB =
50 - (1/2)QA. Solving these two equations simultaneously gives QA = QB = 25.
3. Suppose that a monopolist faces a linear inverse demand function P(Q) = a - bQ,
where P is the price in dollars per unit and Q is the quantity in units. The monopolist
has a constant marginal cost of c dollars per unit and no fixed cost. What is the
deadweight loss caused by the monopoly pricing compared to the socially optimal
pricing?
a) DWL = (a - c)^2 / (8b)
b) DWL = (a - c)^2 / (4b)
c) DWL = (a - c)^2 / (2b)
d) DWL = (a - c)^2 / b
Answer: a) DWL = (a - c)^2 / (8b)
Rationale: The monopoly quantity is determined by setting marginal revenue equal to
marginal cost: MR(Q) = MC(Q), which implies a - 2bQ = c, or QM = (a - c) / (2b). The
monopoly price is then PM = a - bQM = a - b(a - c) / (2b) =
(a + c) / 2. The socially optimal quantity is determined by setting price equal to
marginal cost: P(Q) =
MC(Q), which implies a - bQ* = c, or Q* =
(a - c) / b. The socially optimal price is then P* =
, c. The deadweight loss is the area of the triangle between the demand curve and the
marginal cost curve from QM to Q*, which is DWL =
(1/2)(Q* -
QM)(PM -
P*) =
(1/2)((a -
c)/b -
(a -
c)/(2b))((a +
c)/2 -
c)=
(a -
c)^2 /
(8b).
B:
1. An example of a barrier to entry is
A. high profits.
B. superior technological knowledge.
This is the correct answer.
C. increasing marginal costs.
Your answer is not correct.
D. product differentiation.
2. Producing where marginal revenue equals marginal cost is equivalent to producing where
A. average total cost equals average revenue.
B. total profit is maximized.
Your answer is correct.
C. total revenue is equal to total cost.
D. average fixed cost is minimized.
3. Academic book publishers hire editors, designers, and production and marketing managers
who help prepare books for publication. Because these employees work on several books
simultaneously, the number of people the company hires will not go up and down with the
quantity of books the company publishes during any particular year. The salaries and benefits of
people in these job categories will be included in
