WILLIAM E. SIMON GRADUATE SCHOOL OF
GBA 461 Fall 2012
Core Economics for MS Students
Professor Andras Miklos
E-Mail Address: firstname.lastname@example.org
Final Exam Questions
The exam contains 8 questions. The total number of points is 160. Note that not all questions are weighted equally and allocate your time accordingly. Good luck!
Duration: 120 minutes
1. (20 points) Suppose all individual firms in a competitive industry have the same cost function: TC = 800 + 2Q2. Given this cost function, the marginal cost for each firm is MC =
4Q. The cost function is the same in the short run and the long run except that the 800 is sunk in the short run and is a quasi fixed cost in the long run (it can be avoided by exiting the industry). An unlimited number of firms can enter this competitive industry with this same cost function. Derive and graph the short run supply curve for an individual firm. Derive and graph the long run supply curve for the industry.
The short run supply curve for a firm is the portion of its SRMC curve that is above
AVC. In this case AVC is 2Q and thus SRMC is always above it. The short run supply curve for a firm is thus P = 4Q.
This is a constant cost industry since all firms (existing and potential) have the same cost function). The equilibrium in the long run is where price equals the low point of the
LRAC curve (where there are no economic profits). The industry long run supply curve is horizontal at this price. The number of firms in the industry adjusts depending on the
GBA 461 Final exam 2012 Fall demand for the product. The equilibrium price can be found in several ways. The easiest is to note that marginal and average costs are equal when average cost is at a minimum: 4Q = 800/Q + 2Q; So Q* = 20; and the P* = $80 (inserting Q* into either cost equation. Thus the long run industry supply curve is P = 80.
2. (20 points) The XYZ Company produces a software program that is recorded on one CD, packaged, and mailed to customers. The market is perfectly competitive, and the current market price is $10/unit (unit = one package of the software). XYZ owns one