Boazii University g c Department of Economics Fall 2011 EF 501 MICROECONOMICS Problem Set 1. True or False? If false, briey explain.

(a) If a consumers preferences are transitive then they must be complete as well. (b) Assuming there are only two goods, if one good is a bad and the other is a good, then the indierence curves are upward sloping. (c) Marginal cost curve intersects Average Variable cost curve at its minimum. (d) If a production function exhibits increasing returns to scale then its marginal rate of technical substitution must be increasing. (e) If Average Cost is decreasing as output increases, then there are economies of scale. (f) The price of the output does not enter the cost minimization problem of a price taker rm who is aiming to produce an output level Q. (g) In a second degree price discrimination, the monopoly sells dierent units of output for dierent prices, but every buyer who buys the same amount pays the same price. 2. Suppose you have $120 to spend on good x and good y. Suppose your utility is u(x, y) = min{2x, y}. As a utility maximizer, you have decided to buy only 12 units of good y. If the price of good x is $8, what must be the price of good y? 3. Suppose that a consumer consumes only food(F) and entertainment(E). Suppose PF = $5, PE = $10, I = $600. Suppose the utility function is u(F, E) = F E. (a) Find the optimal bundle. (b) Suppose now that the consumer has to have a minimum of 50 units of F, and a maximum of 20 units of E. Draw the new budget constraint and nd the new optimal bundle. 4. Suppose a consumer has the utility function u(x, y) = 2x+3y. The prices and income are Px = 1, Py = 2, and I = 300. Find the optimal bundle. Show it on a graph. What happens if the price of x increases to Px = 2 How much did the optimal x consumption change? 1

5. For each of the total cost functions given below, (1) nd the AC, AV C, AF C and M C, and (2) verify that M C intersects the AV C and the AC at their minimum. (a) T C(Q) = 2Q2 Q + 4 (b) T C(Q) = 1000 + 50Q2 (c) T C(Q) = Q3 + 1 6. Suppose that a rm has a production function given by Q = f (K, L) = L2 K + L. Find M RT SL,K . Is it diminishing? Does this production function exhibit increasing, constant or decreasing returns to scale? 7. Suppose a rm has production function given by Q = L1/3 K 1/3 3. Suppose the prices are given as follows, p = 9, w = 3, r = 1. (a) If the rm is operating in the short run and has a xed capital amount K = 8, then nd the short-run prot maximizing labor amount. (b) Suppose now the rm operates in the long-run. Find the prot maximizing capital and labor combination. 8. Suppose that a rm has a production function Q = KL + K, and the input prices are w = 3 and r = 6. If the rm is targeting to produce Q = 200, then nd the cost-minimizing labor and capital combination. 9. Suppose that a perfectly competitive rm has a short-run total cost function ST C(Q) = 10+5Q+0.2Q2 . Suppose also that the prevailing market price is $10. Find the shortrun supply curve of this rm (when writing the supply curve, express Q in terms of P ). Find the prot maximizing output level and the prot level for this rm. 10. Suppose that a perfectly competitive rm has a short-run supply function ST C(Q) = 20 + Q + Q2 . Suppose also that the prevailing market price is $5. Does this rm shut down in the short-run? 11. Suppose that a perfectly competitive rm has a long-run supply function LT C(Q) = kQ2 . Suppose also that the prevailing market price is p. For what values of k and p does this rm exit the market? 12. Suppose that a monopoly faces a market demand given by Q = 100 P/2. Its marginal cost is M C(Q) = Q. Suppose that the monopoly cannot price discriminate. Find the prot maximizing quantity. What price does this monopoly charge? Find the price elasticity of demand at this price and quantity. Find the prot. 2

13. Suppose that a monopoly faces a market demand given by P = 30 2Q. Its total cost is T C(Q) = 5 + Q2 . Find the prot of this monopoly if it charges a uniform price. If it can perfectly price discriminate, what would be the prot level? 14. Suppose that a monopoly faces only one buyer with a demand given by P = 222Q. The monopolys total cost is T C(Q) = 2Q. (a) Find the uniform price that maximizes the prot. (b) Suppose that the monopoly can charge a subscription fee to the buyer. Find the prot maximizing fee and the price per unit.