Microeconomics Questions -

Q1) Let the monthly demand for apples in North Carolina be D(p) = 120,000 x (6 - p) pounds and let monthly supply be S(p) = 40,000 x (p -4) pounds.

a) What is the price of apples in North Carolina? What are consumer and producer surplus?

b) Suppose North Carolina offers a subsidy of $1 per pound of apples sold. What is the price consumers pay after the subsidy is imposed? What is government surplus?

Q2) Dylan Co. sells hammers to US retailers. The annual demand for its hammers is D(p) = 25,000 x (30 - p) and its annual cost of production is TC(q) = 400,000 + 20q. Its factory has a capacity of 150,000 units.

a) What is the profit maximizing price for Dylan Co. to charge? How many units will they sell at that price?

b) Suppose Dylan Co. has the opportunity to sell hammers in China as well. It has determined that demand in China is D(p) = 100,000 x (24 - p). What prices should it charge in China and the US?

c) Suppose Dylan Co. can expand its factory so that it can produce up to 400,000 units. The expansion will cost $7 million dollars. The discount rate is 4%, investment occurs at time 0, and earnings begin at time 1. Assume that demand and Dylan Co.'s cost structure will remain fixed in perpetuity. What is the NPV of this project?

Q3) Circle the most appropriate answer:

a) Since August, automobile inventories have been rising. Moreover, recent unemployment numbers suggest that European economies will grow more slowly than expected. What direction are auto prices likely to go? HIGHER or LOWER or UNCLEAR

b) Brainscan Inc. has decided to enter the Chinese market and has determined that the elasticity of demand for its scanners is -3. How much should it mark up its product?

0%   25%   50%    75%    100%   200%

c) Suppose a cap and trade system has been put in place for SOx pollution and the current permit price is $0. Suppose the government increases the number of permits. The permit price is likely to:

INCREASE or DECREASE or STAY THE SAME or UNCLEAR

d) Jonesville Steel sells metal products in several markets worldwide. It has price-setting power in each market, and marginal cost that is decreasing in the quantity sold. If demand for its products rises in Singapore, should it raise prices in Dubai, cut them, or keep them the same?

RAISE or CUT or KEEP SAME

e) Demand can be easily estimated by performing a regression of historical prices on historical quantites bought and sold: TRUE or FALSE

f) Jill's Creamery has an average cost per ice cream sold of $2 and charges a price of $1.50. Jill's should definitely raise prices: TRUE or FALSE 

g) Jill's Creamery has an average cost per ice cream sold of $2 and charges a price of $1.50. In the long run, as fixed costs are recoverable, Jill's should shut down. TRUE or FALSE

Q4) Suppose Nidhi sells custom benches to customers throughout Durham. She currently only sells high end benches, which cost $500 each to produce. Older customers are willing to pay $1000 each, so she earns decent money. She is considering offering a lower priced bench to target a younger customer. Suppose that the cost of producing a low end bench is $350. Older customers value the low end bench at $600. Younger customers value a low end bench at $500 and a high end bench at $800. Suppose that 1/2 of potential customers are older and 1/2 are younger. Each customer only buys, at most, one bench. Should Nidhi offer the low end bench? How much should she charge for each bench? Note: if she chooses not to offer one of the benches, write "NA" for the price.

Q5) In the last two weeks, the Iranian currency, the Rial, has been collapsing. Its value against the dollar has dropped by 40%, and may have fallen further by the time you take this exam. There is a lot of complexity in currency pricing, and we will not get into that in this class (see Finance and Macro for more discussion of this), but you'll get some idea of what is going on from this question. Iranian exporters (like the State oil company) sell abroad in dollars, but pay their workers and suppliers in Rials. Therefore, they must "sell" their dollars to get Rials. Iranian importers buy their products with dollars, but get revenue in Rials from selling domestically. Therefore, they need to "buy" dollars with their Rials. Suppose that the daily supply of dollars (from exporters) is given by S(p) = 1,000 x (p - 20,000) and the daily demand for dollars (from importers is given by D(p) = 200 x (44,000 - p), where p is the Rial to Dollar exchange rate.

a) What is the exchange rate (i.e., what is p)?

b) Suppose that severe sanctions are placed upon Iran, so that its exports decline by 80%, at any price. What is the new exchange rate?

c) Governments often keep "reserves" of foreign currencies so that they can keep their exchange rates stable. Suppose that the Iranian government does not want the Rial to become less valuable, and starts supplying dollars to the market. How many dollars per day would it have to "sell" to keep exchange rates steady at the level you found in (a), given the level of exports in (b)? Suppose the government initially has reserves of $100,000,000. For approximately how many days will it be able to support the Rial at the level in (a)?

d) In reality, shifts in supply and demand for currencies tend to be gradual, meaning exchange rates adjust gradually. Briefly discuss how government "support" for currencies, as in (c), affects this process.

Q7) Let the demand for steel be D(p) = 20,000 x (80 - p) tons and the supply of steel be S(p) = 100,000 x (p - 20) tons. Each ton of steel produced creates 30 units of NOx pollution.

a) Suppose that a cap and trade scheme is in place for the steel market and the cap on NOx pollution is 24,000,000 units. What is the price of steel in this market? What is the price of a permit? 

b) Suppose the government increases the number of permits to 35,000,000. What is the new price of steel and price of a permit?