ECN 100B WQ 2021 Midterm
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You have 24 hours to complete and upload your answers to this exam to
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SHARP ON FRIDAY Fe
uary 5TH. LATE EXAMS WILL NOT BE AC-
CEPTED.
The exam is open book. BUT YOU MUST WORK BY YOURSELF. You may print and
work directly on this exam or use your own paper, in which case it is important to designate
which answers are to which questions very carefully. You may use a calculator.
The exam has three sections:
1. Answer 3 true/false + explanations [5 points each]
2. Answer 3 short answers [5 points each]
3. Answer 5 multi-part problems [14 points each]
In order to protect the integrity of a UC Davis degree and reward the sincere efforts of
my students, academic dishonesty of any kind will not be tolerated. All violations of the
Academic Code will be refe
ed to Student Judicial Affairs for discipline and to impose the
strictest sanctions.
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1 True/false + explanations
Please answer whether a statement is true or false and give a 1-2 sentence explanation of
why this is the case. NO PARTIAL CREDIT WILL BE GIVEN IF YOU WRITE “TRUE”
OR “FALSE” BUT DO NOT PROVIDE AN EXPLANATION.
1.1 Deadweight loss is always zero under perfect competition.
1.2 A factor market demand curve is the horizontal sum of the
factor demand curves of the various firms that use the input.
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1.3 Without government regulation, every market would be per-
fectly competitive.
2 Short answers
Please provide 2-3 sentences answering each question.
2.1 What is a potential problem that could arise when a govern-
ment wants to regulate a monopsony with a minimum wage?
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2.2 What is the shutdown condition and why is it important to
check it?
2.3 Is price discrimination always bad for all consumers?
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3 Multi-part problems
Please answer all parts of the question. ALL QUESTIONS WILL BE WORTH THE SAME
PERCENTAGE OF THE EXAM REGARDLESS OF THE NUMBER OF SUB-PARTS
AND ALL SUB-PARTS OF A QUESTION WILL HAVE THE SAME VALUE.
3.1 Perfect competition question
Imagine many small farms selling usb charging cables on a large online marketplace, in a
setting of perfect competition. Each individual firm faces costs C(q) = 2q2.
A. Derive a firm’s supply curve.
Now assume there are 200 firms selling usb cables on the same large online marketplace.
B. Derive the market supply curve.
Suppose the market demand curve is QD(p) = 1000 − 50p.
C. What are equili
ium price and equili
ium quantity?
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D. Graph the inverse demand and inverse supply curves for the market and
indicate the equili
ium price and quantity.
E. What are consumer and producer surplus?
3.2 Price cap monopoly question
Imagine a university called Bavis that is the monopoly in the market for economics degrees,
with cost-function C(Q) = 25Q XXXXXXXXXXImagine the inverse demand function for economics
degrees is p(Q) = 400 − 25Q. The government has decided it would ensure that there is no
deadweight loss in this market for economics degrees by setting a price cap on Bavis.
A. What would be the equili
ium price and equili
ium quantity if the govern-
ment did not impose a price cap and Bavis was able to operate as an un-regulated
monopoly?
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B. At what optimal price should the government cap economics degree sales?
C. What are the new post-price cap equili
ium price and equili
ium quantity?
D. What is Bavis’s new profit at the equili
ium?
E. Prove that this new profit level is a global maximum.
F. Show the new equili
ium price and equili
ium quantity graphically. Include
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the original and regulated inverse demand curves, firm’s marginal revenue curve,
and firm’s marginal cost curve.
G. What are consumer surplus, producer surplus, and deadweight loss at the
equili
ium? How do they compare to the case of the un-regulated monopoly??
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3.3 Price discrimination question
Imagine Bavis continues to be the monopoly in the market for economics degrees, though
now with cost-function C(Q) = 15Q2. And now the inverse demand function for economics
degrees is p(Q) = 2000 − 10Q. The government no longer imposes a price cap on Bavis.
A. What are equili
ium price and equili
ium quantity?
B. Show the equili
ium price and equili
ium quantity graphically. Include the
inverse demand curve, firm’s marginal revenue curve, and firm’s marginal cost
curve.
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Now assume that Bavis is able to perfectly price discriminate in the market for economics
degrees.
C. What three conditions must be true for this perfect price discrimination to
e possible?
D. What are the equili
ium prices and equili
ium quantity with perfect price
discrimination?
E. What are consumer surplus, producer surplus, and deadweight loss at the
perfect price discrimination equili
ium?
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3.4 Monopsony question
Now imagine that Bavis is a monopoly employer of labor in the city of Bavis. Suppose the
firm faces an inverse supply curve of labor of w(L) = 40 + 12L.
A. What is the marginal expenditure curve for the Bavis?
Now assume the monopsony has an inverse demand curve for labor of w(L) = 100 − 6L.
B. What are the equili
ium wage and labor quantity?
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C. Show the equili
ium wage and equili
ium labor quantity graphically. In-
clude the inverse demand curve and the firm’s supply and marginal expenditure
curves.
D. What are Bavis’s surplus, workers’ surplus, and deadweight loss at the equi-
li
ium?
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3.5 Factor prices question
Imagine Bavis is producing economics degrees following production function q(L,K) =
L0.5K0.5. In the short run, capital is fixed at K̄ = 625. Bavis faces price p = 150 and
can hire as many workers as it would like at a constant wage w = 75. Also, Bavis’s fixed
costs, F , are 0.
A. Find equili
ium labor (L∗) and wages.
B. What are Bavis’s profits at this equili
ium?
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C. Prove that this profit level is a global maximum.
SPACE FOR NOTES. SPACE BELOW THIS SENTENCE WILL NOT BE GRADED.
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