University of Hartford

Barney School of Business and Public Administration

MBA 614: Economic Analysis for Managers Instructor: Dr. Ke Yang
Final Exam
Total: 100 points
Summer 2014



Instructions:
Read question carefully and be sure you answer all parts of the question you choose. Please make sure
you show all the reasoning and steps that lead to your final conclusion. Partial credit will be given if
your answer is on the right track but not complete.
Please make sure all the notations and marks in your calculation and graphs are legible.


1. (20 points) (a) What are the basic characteristics of a perfectly competitive market? Can you give an
example of real market that resembles a perfectly competitive market? (b) With a graph, please explain how
perfect competition (in the long run) acts to assure zero economic profit for the producer?
Perfect competition is characterized by many buyers and sellers, many products that are similar in nature and, as
a result, many substitutes. Perfect competition means there are few, if any, barriers to entry for new companies,
and prices are determined by supply and demand. Thus, producers in a perfectly competitive market are subject
to the prices determined by the market and do not have any leverage. For example, in a perfectly competitive
market, should a single firm decide to increase its selling price of a good, the consumers can just turn to the
nearest competitor for a better price, causing any firm that increases its prices to lose market share and profits.
Other characteristics include:
Firms produce homogeneous, identical, units of output that are not branded.
Each unit of input, such as units of labour, are also homogeneous.
No single firm can influence the market price, or market conditions. The single firm is said to be a price taker,
taking its price from the whole industry.
There are a very large numbers of firms in the market.
There is no need for government regulation, except to make markets more competitive.
There are assumed to be no externalities that is no external costs or benefits.
Firms can only make normal profits in the long run, but they can make abnormal profits in the short run.
Agricultural markets are the closest representation of perfectly competitive markets. These are marketplaces
which have a large number of vendors selling fruit, vegetables, and poultry - namely, identical produce. The
prices of goods are competitive, and no single seller can yield an influence over the pricing. Consumers are free
to pick any seller, depending upon their choice.
Graph below shows that although high prices cause an industry to expand, entry into the industry eventually
returns prices to the point of minimum average total cost. In the figure, the industry is in long-run
University of Hartford
Barney School of Business and Public Administration
MBA 614: Economic Analysis for Managers Instructor: Dr. Ke Yang
Final Exam
Total: 100 points
Summer 2014



equilibrium. The industry produces output Q
1
, where supply curve S
1
intersects demand curve D
1
, and
the price is P
1
. At this point the typical firm produces output q
1
. Since price equals average total cost at
that point, the firm makes zero economic profit.

Now suppose an increase in demand occurs, with the demand curve shifting to D
2
. This causes "high
prices" in the industry, as the price rises to P
2
. It also causes the industry to increase output to Q
2
. With
the higher price, the typical firm increases its output from q
1
to q
2
, and now makes positive profits, since
price exceeds average total cost.






However, the positive profits that firms earn encourage other firms to enter the industry. Their entry, "an
expansion in an industry," leads the supply curve to shift to S
3
. The new equilibrium reduces the price back to
P
1
, "bringing an end to high prices and manufacturers' prosperity," since now firms produce q
1
and earn zero
profit again. The only long-lasting effect is that industry output is Q
3
, a higher level than originally


2. (20 points) Assume the industry demand for a product is P = 1000 20Q. Assume that the marginal cost of
the product is $10 per unit.
a. What price and output will occur under pure competition? What price and output will occur under
pure monopoly?
b. Draw a graph that shows the lost gains from trade that result from having a monopoly.


MC = 10
P = 1000 20Q , Q = 50 (P/20)
University of Hartford
Barney School of Business and Public Administration
MBA 614: Economic Analysis for Managers Instructor: Dr. Ke Yang
Final Exam
Total: 100 points
Summer 2014




Pure competition is characterized by price takers which results due to a large number of sellers with same
information and free entry and exit.

Here, optimal P = MR = MC

Therefore P = 10, Q = 49.5 (mathematical number though practically it should be integral)

Under pure monopoly,
A single firm has total control over the market for that product.

Here optimal point, MC = MR
Total Revenue = P*Q
MR = d(TQ)/d(Q) = Q*dP/dQ + P* dQ/dQ
= (-20)*(1000 P)/20 + P
= -1000 + 2000 40 Q = 1000 40Q = 10

Therefore Q= 990/40 = 24.75

P = 1000- 495 = 505

B) the associated loss in potential gains from trade is pictured by right hand side shaded triangle






















0






24.75



D

Price

$505


$10 MC
MR
Quantity
the associated loss in
potential gains from trade
University of Hartford
Barney School of Business and Public Administration
MBA 614: Economic Analysis for Managers Instructor: Dr. Ke Yang
Final Exam
Total: 100 points
Summer 2014




3. (20 points) As a result of strikes in Canada the world price of nickel rose by 20 percent in December. Over
the same period, the quantity demanded of nickel decreased from 10,000,000 to 8,500,000 pounds
worldwide. The world price of nickel was 70 cents per pound before the strikes.
a. Show graphically the effect of Canadian strikes on the market for nickel.







b. Given the information above, whats the price elasticity of the world demand for nickel over the
relevant price range?
elasticity = P(Q) = | [Q/(Q1+Q2)/2 ]/[ P/(P1+P2)/2 ] |
Therefore
P(Q) = | [-1,500,000 / 9,250,000]/[ 0.14 / 0.77 ] | = 0.891892 . Since its less than 1. The elasticity is inelastic.

c. Did the total expenditure for nickel increase, decrease, or remain constant after the strikes? How is
this consistent with your answers to part (a) and (b)? Explain clearly and concisely.
TE for nickel before strikes = .70 x 10,000,000 = $7,000,000
TE for nickel after strikes = .84 x 8,500,000 = $7,140,000
Therefore the TE increased after strikes. This is consistent with the law of elasticity of demand since in our case
the elasticity is less than 1 (demand being inelastic) This also shows that in the inelastic portion of the demand
curve total revenue/expenditure increases as the price increases. Here TE increased from $7,000,000 to
$7,140,000 when price increased from .70 to .84.
8,500,000 10,000,00
0
.84
.70
Supply pre strike
Quantity
Price per pound
Supply post strike
University of Hartford
Barney School of Business and Public Administration
MBA 614: Economic Analysis for Managers Instructor: Dr. Ke Yang
Final Exam
Total: 100 points
Summer 2014




4. (20 points) If demand is represented by Qd = 50 -.5P +.005I where I is income and I=$50,000 and supply is
represented by Qs = 100 +.4P - 2W where W is wages and W=$15.00.
a. Compute the equilibrium price and quantity where wages=W=$15.00.
b. Compute the equilibrium price and quantity if income falls to I=$40,000?
c. Plot the demand and supply for the two income level. In the graph, mark all values that fully identify
the curve.
University of Hartford
Barney School of Business and Public Administration
MBA 614: Economic Analysis for Managers Instructor: Dr. Ke Yang
Final Exam
Total: 100 points
Summer 2014



a) At equilibrium
Qs = Q
d
100 +.4P - 2W = 50 -.5P +.005I
100 + .4P -2(15) = 50 -.5P +.005(50,000)
.9P=230
P *= 255.55
Plugging this in supply equation we get Q* = 172.22 or 172
b) At equilibrium
Qs = Q
s
Or Qs = 100 +.4P - 2W = 50 -.5P +.005I
100 + .4P -2(15) = 50 -.5P +.005(40,000)
.9P = 180
P* = 200
Plugging this in supply equation we get Q* = 150







University of Hartford
Barney School of Business and Public Administration
MBA 614: Economic Analysis for Managers Instructor: Dr. Ke Yang
Final Exam
Total: 100 points
Summer 2014



c) Supply intercept
Qs = 100 +.4P - 2W
Qs = 100 + .4P -2(15)
1/.4 Qs = 100/.4 + P -30/.4
=2.5Qs = 250+P-75
P= -175 +2.5 Q
Demand intercept
Old demand with income @50,000
Q
d
= 50 -.5P +.005(50,000)
Q
d
= 50 -.5P +250
1/.5 Q
d
= 50/.5 P + 250/.5
2 Q
d
= 100-P+500
P = 600 2 Q
d
New demand with income @ 40,000
Q
d
= 50 -.5P +.005(40,000)
Q
d
= 50 -.5P +200
1/.5 Q
d
= 50/.5 P + 200/.5
2 Q
d
= 100-P+400
P = 500 2 Q
d

P
Q
$175
$600
$500
D1
D2
$255.55
172 150
$200
Income @50,000
Income @40,000
University of Hartford
Barney School of Business and Public Administration
MBA 614: Economic Analysis for Managers Instructor: Dr. Ke Yang
Final Exam
Total: 100 points
Summer 2014




5. (20 points) Healthy Harrys juice Bar has the following cost schedules:
Q
(vats)
Variabl
e cost
Total
cost
0
$0 $30
1
10 40
2
25 55
3
45 75
4
70 100
5
100 130
6
135 165

a. Calculate the average variable cost, average total cost, and marginal cost for each quantity level.

Q TVC TC AVC ATC MC
0 0 30 - - -
1 10 40 10 40 10
2 25 55 12.5 27.5 15
3 45 75 15 25 20
University of Hartford
Barney School of Business and Public Administration
MBA 614: Economic Analysis for Managers Instructor: Dr. Ke Yang
Final Exam
Total: 100 points
Summer 2014



4 70 100 17.5 25 25
5 100 130 20 26 30
6 135 165 22.5 27.5 35

b. Graph all three curves. What is the relationship between the marginal-cost curve and the average-
total-cost curve? Between the marginal-cost curve and the average-variable-cost curve? Explain.

WHEN Ac falls MC is less than AC
when AC rises MC>AC
the same holds for the relation between AVC and MC
when AVC falls then AVC>MC
when AVC rises then AVC<MC
In other words, When the marginal cost curve is above the ATC, the ATC curve is rising. When the
marginal cost curve is below the ATC, the ATC curve is falling. The relationship is the same for the
marginal cost curve and the AVC curve. So, the marginal cost curve cuts through the bottom of both the
ATC and the AVC curves.
0
5
10
15
20
25
30
35
40
45
0 1 2 3 4 5 6 7
ATC, MC,AVC
OUTPUT
AVC
AC
MC