ECO201E 2014 JUL EXAM

Q1
Assume you own and manage your own fruit stand. The financial information for the stand
is given below (all values are monthly).
Wholesale fruit cost $2,000
Labor $800
Fruit stand lease $1,000
Monthly revenue $5,000
Answer each of the following, based on the information provided.
a. Calculate your accounting profit
b. If your other employment opportunity is to earn $1000 per month working at a t-shirt stand
(and you are equally happy selling fruit or t-shirts), what is your economic profit? Should
you continue selling fruit? Explain.
c. What happens to your economic profit if you enjoy selling t-shirts and would be willing to
forego up to $250 per month to work selling t-shirts rather than fruit? Should you continue
selling fruit? Explain.

1a. Accounting profit = TR - (total explicit costs) = 5000 - 3800 = 1200 

1b. Economic profit = TR - (total implicit and explicit costs) = 5000 - (3800 + 1000) = 5000 - 

4800 = 200. Yes, because economic profit is positive. 

1c. Economic profit becomes -50. 5000 - (3800 + 1000 + 250) = 5000 - 5050 = -50. No, 

because economic profit is negative. 

Q2

You own and operate a fruit stand. Your demand curve is given by P = 0.5 – 0.002Q, where P is in dollars and Q is in kilograms of fruit. Your marginal cost curve is MC = 0.006Q. Your fixed costs equal $10.

a. Graph your demand and marginal cost curves.

b. Derive and graph your marginal revenue curve.

c. Calculate the profit-maximizing price and quantity and show them on your graph.

d. Calculate your profit.

e. Calculate consumer surplus at the profit-maximizing price and quantity

          

b. MR = 0.5 – 0.004Q.

c. Profit-maximizing price = $0.4, profit-maximizing quantity = 50.

d. Profit = TR – TC = ($0.4 X 50) – $10 – ($0.3 X 50) = –$5.

e. Consumer surplus = (½)(50)($0.1) = $2.5.

Q3

Assume a tax of $10 per unit is placed on sellers in the market for bicycles. Use the supply and demand functions below to find each of the following:

P = 150 P = 300 – 7.5 Q

where P is in dollars and Q is in millions of bicycles.

a. consumer surplus before the tax.

b. consumer surplus after the tax.

c. the loss in consumer surplus from the tax.

d. How does deadweight loss from the tax compare to the loss in consumer surplus in this particular situation? Explain.

a. C.S. before the tax = 1/2 (20) (150) = 1/2 (3000) = 1500.

b. C.S. after the tax = 1/2 (18.67) (140) = 1/2 (2613.8) = 1306.9.

c. The loss in consumer surplus = 1500 – 1306.9 = 193.10.

d. Since the supply curve is horizontal (the price elasticity of supply is infinite), there is no producer surplus in this case. Consumer surplus decreases by 193.10, but (10)(18.67) = 186.70 is collected in tax revenue. Deadweight loss = loss in C.S. – tax revenue which is 193.10 – 186.70 = 6.4. The deadweight loss triangle, calculated directly, equals 1/2 (1.33) 10 = 1/2  13.3 = 6.65 (which equals the above when rounding error is considered). 

Q4

You and a competitor are each selling t-shirts with the university logo at a table on campus. You must decide whether to sell your t-shirts for $15 each or $20 each. The profit you receive will depend on how much you decide to charge and on how much your competitor decides to charge. The payoff matrix for the decision is given below.

a.          If $15 and $20 are the only two price choices, what are the dominant strategies for you and your competitor?

b.         Is there an equilibrium? If so, what is it?

c.          If each firm knows that cutting price a little further from $15 has the same effect as cutting it from $20 to $15, what will price equal in the end? Explain

a The dominant strategy for each is $15.

b. Yes, at $15.

c. Price will eventually fall to equal marginal cost, since each firm knows that further cuts will lead to increased profits.

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HOPE YOU GET THE ANSWERS CORRECT.

AWESOME EXPLANATION OF FINDING ELASTICITY THROUGH POINT ESTIMATE

THANKS FOR THE CLEAR EXPLANATION. TOTALLY WOKE ME UP ON THE HOW-WHY SITUATION. *PEACE*