ECON 1332 – Principles of Microeconomics

Spring, 2021 –

Duration: 2.5 Hours

Answer ALL FIVE of the following questions (10 points each):

Define the following terms: perfect competition, marginal revenue, monopolistic competition, oligopoly, cartel.

A perfectly competitive farmer produces wheat according to the following cost functions:

TC = 500 + 120Q + 2.5Q2 and MC = 120 + 5Q

where TC = total cost, MC = marginal cost, and Q = the level of output. If the farmer can sell wheat at a fixed price of $200 per bushel, how many bushels of wheat should the farmer produce? Show that this is a short run equilibrium. What are the levels of output and price in the long run equilibrium?

A monopolist produces oil according to the following marginal cost function:

MC = 60 + 2Q

where, MC = marginal cost and Q = the level of output. If the monopolist has a demand function given by P = 100 – Q, determine the equilibrium values of output and price for the monopolist. How will your answer be affected, if the monopolist is now a perfectly competitive industry?

Suppose a monopolist produces cars in one plant and sells them in two different markets. Suppose further that the cost and demand functions conform to the following formulas:

MC = 90 + Q P1 = 200 - Q1 P2 = 220 - 2Q2

where, MC = marginal cost, and Qs are the outputs sold in the two markets. Derive the optimal levels of output and price in each market.

A duopoly consists of two firms. The total demand function for the industry is given by

P = 260 – 2Q. The two firms have the following cost functions:

MC1 = 50 + 2Q1	MC2 = 80 + 4Q2

Determine the optimal levels of output and price based on the Cournot solution.

Determine the optimal levels of output and price under the cartel solution.