econ final exam 1

Please Read: Each short answer question is worth 10 points. The exam is due by the last day of class Monday 5/11 11:59 pm.

1) Golda Rush quit her job as a manager for Home Depot to start her own hair dressing salon, Goldilocks. She gave up a salary of $40,000 per year, invested her savings of $30,000 (which was earning 5 percent interest) and borrowed $10,000 from a close friend, agreeing to pay 5 percent interest per year. In her first year, Golda spent $18,000 to rent a salon, hired a part-time assistant for $12,000 and incurred another $15,000 on equipment and hairdressing material. Based on this information, what is the amount of her explicit costs?

2) Vipsana’s Gyros House sells gyros. The cost of ingredients (pita, meat, spices, etc.) to make a gyro is $2.00. Vipsana pays her employees $60 per day. She also incurs a fixed cost of $120 per day. Calculate Vipsana’s variable cost per day when she produces 50 gyros using two workers?

3) Damian owns a tattoo parlor and has hired three tattoo artists to work for him. The marginal product of labor is 8 for the first artist, 12 for the second artist, and 7 for the third artist. What is Damian’s average product of labor for these three tattoo artists?

Article Summary

According to the Department of Agriculture, net farm income will grow to a record high of $120.6 billion in 2013, up from the previous high mark in 2011 and after adjusting for inflation, its second highest level since 1973. Net cash income, however, is expected to fall by 10 percent due to unsold inventories. Exports of chickens and milk are expected to rise by 3 percent and 17 percent, respectively.

Source: Ros Krasny, “Farm income poised for record 2013: USDA,” Reuters, August 27, 2013.

4) Refer to the Article Summary. All else equal, the increase in demand for chicken and milk exports will ________ the market prices for these exports and ________ economic profit in these markets.

5) The Jeans Store sells 7 pairs of jeans per day when it charges $100 per pair. It sells 8 pairs of jeans per day at a price of $90 per pair. The marginal revenue of the eighth pair of jeans is

6) Suppose that if a local McDonald’s restaurant reduces the price of a Big Mac from $4.00 to $3.25, the number of Big Macs it sells per day will increase from 4 to 5. Explain the output effect and the price effect resulting from this change. What is the total change in revenue received which results from this price decrease?

Hint: Use a graph to illustrate both the loss in revenue from selling each of the first 4 Big Macs for $0.75 less and the additional revenue from selling 1 more Big Mac. (You do not need to include the graph).

7) How does the demand curve for an oligopoly firm differ from the demand curves for firms in competitive market structures?

8) Consider an industry that is made up of nine firms each with a market share (percent of sales) as follows:

a. Firm A: 30%

b. Firm B: 20%

c. Firms C, D and E: 10% each

d. Firms F, G, H and J: 5% each

What is the value of the four-firm concentration ratio and how is the industry categorized?

9) Consider two industries, industry W and industry X. In industry W there are five companies, each with a market share of 20% of total sales. In industry X, there are six companies. One company has a 50% market share and each of the other five firms has a market share of 10%.

a. Calculate the four-firm concentration ratio for each industry.

b. Calculate the Herfindahl-Hirschman Index (HHI) for each industry.

c. What do the values of the two concentration measures imply about the degree of market power in the two industries?

10) Serafina was earning $75 per hour and working 50 hours per week. Serafina’s wage rose to $90 per hour, and as a result, she now works 60 hours per week. What can you conclude from this information about the income effect and the substitution effect of a wage change for Serafina?

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