Mid Term Key
EconS452
15 Problems*30 points each = 450 points
Score based on 400 points
Midterm
10/25/2012
Name:___________________________
1.
Zelda Manufacturing has a rather unique product that sells for $15 per unit, and the marginal cost is $7.50. Determine the Lerner index for Zelda Manufacturing. Does this index indicate market power? Using the SCP paradigm, what might the conduct of Zelda indicate about the structure of the industry?
The Lerner index is (P - MC)/P = (15 - 7.5)/15 = .50. Since the Lerner index is positive, there is evidence of market power. The ability to exercise Market power suggests that Zelda is participating in a market that is much closer to a monopoly than a perfectly competitive market.
2.
A manager derives satisfaction from income and leisure on the job (shirking).
a. If the manager is paid a fixed salary of $100,000, how much leisure will he or she consume on the job during an eight-hour day? Explain.
b. When the manager is given a salary of $100,000 plus 10 percent of the firm's profits, she or he chooses to spend six hours managing and two hours consuming leisure. Salary and bonus total
$120,000. Does the manager necessarily prefer this situation to the situation in part a?
a. He will consume the whole eight (8) hours as leisure because working (putting forth effort) causes dissatisfaction to the manager. Hence he will shirk if there is no punishment for doing so.
b. The manager does prefer this situation to the situation in (a). There are two consumption bundles now: (1) $100,000 salary plus eight (8) hours of leisure a day, and (2) $120,000 salary plus two (2) hours of leisure a day. Since the original choice of 8 hours shirking and $100,000 is still available, the fact that she chose to work 2 hours reveals that she prefers the second pay scheme. EconS452
Midterm
10/25/2012
3.
The total costs for Morris Industries are summarized in the following table. Based on this information, fill in the missing entries in the table for fixed
15 Problems*30 points each = 450 points
Score based on 400 points
Midterm
10/25/2012
Name:___________________________
1.
Zelda Manufacturing has a rather unique product that sells for $15 per unit, and the marginal cost is $7.50. Determine the Lerner index for Zelda Manufacturing. Does this index indicate market power? Using the SCP paradigm, what might the conduct of Zelda indicate about the structure of the industry?
The Lerner index is (P - MC)/P = (15 - 7.5)/15 = .50. Since the Lerner index is positive, there is evidence of market power. The ability to exercise Market power suggests that Zelda is participating in a market that is much closer to a monopoly than a perfectly competitive market.
2.
A manager derives satisfaction from income and leisure on the job (shirking).
a. If the manager is paid a fixed salary of $100,000, how much leisure will he or she consume on the job during an eight-hour day? Explain.
b. When the manager is given a salary of $100,000 plus 10 percent of the firm's profits, she or he chooses to spend six hours managing and two hours consuming leisure. Salary and bonus total
$120,000. Does the manager necessarily prefer this situation to the situation in part a?
a. He will consume the whole eight (8) hours as leisure because working (putting forth effort) causes dissatisfaction to the manager. Hence he will shirk if there is no punishment for doing so.
b. The manager does prefer this situation to the situation in (a). There are two consumption bundles now: (1) $100,000 salary plus eight (8) hours of leisure a day, and (2) $120,000 salary plus two (2) hours of leisure a day. Since the original choice of 8 hours shirking and $100,000 is still available, the fact that she chose to work 2 hours reveals that she prefers the second pay scheme. EconS452
Midterm
10/25/2012
3.
The total costs for Morris Industries are summarized in the following table. Based on this information, fill in the missing entries in the table for fixed