Managerial Economics Midterm Exam Questions

Q1) Let the monthly demand for steel be D(p) = 20,000 × (80 - p) tons and the monthly supply of steel be S(p) = 40,000 × (p - 20) tons.

a) What is the price of steel in this market? How much is sold each month?

b) Suppose the government wants to help the steel industry with a subsidy of $15 per ton. What will be the cost to the government? What fraction of the subsidy will go to steel producers, and what fraction to consumers? What fraction is deadweight loss?

c) Suppose the government abandons the subsidy and implements an alternative form of support for steel producers: a price floor of $50 per ton. Suppose that suppliers do not realize immediately that there will be an excess supply of steel. What will be the excess supply? Also, draw a graph showing supply and demand in the market, labeling the price floor, the quantity demanded at that price, and the excess supply.  

d) Suppose that the lowest cost suppliers sell at that price and high cost sellers cease to operate. How much steel will be sold? What will be producer surplus?

Q2) The short-run supply of wheat is 10,000 bushels per day, regardless of the price. The demand for wheat is D(p) = 500 × (40 - p) bushels per day. Long-run supply is S_LR(p) =2,500 × (p - 10).

a. What is the price? Is the market in long-run equilibrium?

b. Suppose that the short-run supply can only increase or decrease by 10% per year. Approximately how many years will the market take to return to long-run equilibrium? What will be the long-run price?

Q3) It was recently discovered that the new minimum wage law in Seattle, WA, has substantially raised wages for low income workers, but has reduced the average number of hours that they worked. Average weekly earnings for low income workers were basically unchanged even though hourly pay increased about 10%.

a) What is the elasticity of demand for labor in Seattle? [HINT: hours demanded fell as wages rose. Workers are suppliers of labor, and their revenue didn't change. This allows you to calculate the elasticity of demand for labor].

b) Suppose that the elasticity of supply is 0.5, and that the minimum wage increased wages from $10 to $11 per hour. Suppose that the government wanted to increase hourly pay the same amount, from $10 to $11, but with a subsidy instead of a minimum wage. How much of a wage subsidy would the government need to implement in order to increase hourly pay by the same amount?

c) If this subsidy were implemented, how much higher would employment have been, relative to the case with the minimum wage?

Q4) For the following 9 questions, circle the correct answer. No work need be shown. Questions are each worth 10 points.

a. TRUE or FALSE: You are a manager of a coal mining firm and have witnessed industry-wide inventories rising for several weeks. You should prepare for lower prices.

b. TRUE or FALSE: You are a manager of an iron mining firm. Suppose that the short-run supply of iron is S_SR(p) = 10,000 × p and the long-run supply is S_LR(p) = 20,000 × (p - 2). Suppose the current price is $3. You should prepare for lower prices.

c. TRUE or FALSE: Prices respond to supply shocks more in the short run than in the long run.

d. TRUE or FALSE: The principles of externalities imply that too few skilled musicians will give free concerts.

e. Suppose that an unexpected fire destroys a large mine producing platinum. We should expect the price of platinum to:

i. Rise quickly, then fall over time.

ii. Fall quickly, then rise over time.

iii. Rise slowly over time.

iv. Fall slowly over time.

f. Long-run demand is more elastic than short-run demand because:

i. There is less opportunity to substitute in the short run.

ii. People are less psychologically wedded to their choices in the short run.

iii. Production is easier to scale up and down in the long run.

g. Iceland currently maintains a cap-and-trade system for fishing permits in which permits are given away. It has decided to auction them off next year instead of giving them away. Josephine is a trader in the permit market. She should expect permit prices to

i. Fall.

ii. Rise.

iii. Stay the same.

h. Continuing with (g), Josephine should expect fish prices to

i. Fall.

ii. Rise.

iii. Stay the same.

i. Let the elasticity of demand for Papaya be -2 and let the elasticity of supply be 1. If the government imposes a tax of $1.50 on papayas, the price that consumers pay will rise by:

i. $0.50

ii. $1

iii. $1.50