1996 Micro Free Response

1.    In the country of Lola, sugar had always been produced in a perfectly competitive industry until a dictator seized power and monopolized the production of sugar.

(a)    Draw a graph that shows the output and price the monopolist would choose to maximize profits.

The people of Lola revolt, imprison the dictator, and repeal the law restricting the number of sellers of sugar.

(b)    Explain two conditions that might lead to an increase in the number of sugar sellers after the repeal of the law.

(c)   Describe how an individual seller would determine the profit-maximizing output level of sugar if the sugar industry were perfectly competitive.

(d)    Given your answers in parts (a) and (c), is the repeal of the law likely to make the sugar industry more efficient?  Why?  In your explanation be sure to include an explanation of economic efficiency.

Answer to #1

2.  

Insert Graph here

The Toledo arena holds a maximum of 40,000 people, as indicated in the graph above.  Each year the circus holds eight performances, all of which are sold out.

(a)    Analyze the effect on each of the following of the addition of a fantastic new death-defying trapeze act that increases the demand for tickets.

(i)    The price of tickets
(ii)   The quantity of tickets sold 

(b)    The city of Toledo institutes an effective price ceiling on tickets. Explain whre the price ceiling would be set.  Explain the impact of the ceiling on each of the following.

(i)    The quantity of tickets demanded
(ii)   The quantity of tickets supplied 

(c)    Will everyone who attends the circus pay the ceiling price set by the city of Toledo?  Why or why not?

Answer to #2

3.   Assume that in a perfectly competitive market, a firm's costs and revenues are

• marginal cost = average variable cost at $20

• marginal cost = average total cost at $30

• marginal cost = average revenue at $25

(a)    How will this firm determine the profit maximizing level of output?

(b)    What price will this firm charge?  Explain how the firm determined this price.

(c)    Should this firm produce in the short run?  Why or why not?

(d)    Will this firm earn a profit or incur a loss?  Why?

Answer to #3