Sample Exam 3 Answers

11.  Should you use MP or AP to defend yourself?

12.    Cost of using Desktop model = 200 + 0.035Q
         Cost of using Larger model = 400 + 0.02Q
         Set cost of Desktop = Larger and solve for critical Q.

13.    Cost function
a)  $190,000
b)  $53
c)  $53
d)  C = 240 + 45Q + 30I.

14.    Competitive Market and Firm
a)   Set supply = demand to get market output and then price: Q = 5 (or 500, since Q is measured in 100s); P = 67.50.
b)   Set P = MC to get q = 6.5
c)   Q = 7.5 (or 750); P = 88.75; q = 8.625
d)   No, the new equilibrium in part (c) would generate positive profits for the firms in the industry.  This would attract entry until price is driven back down to a zero profits point.

15.    Longheel Press.
a)  Using MP_L/MP_K = w/r, you can solve for K/L = .077  or K = .077L.  Plug K into the cost function and solve for L: C = 150,000 = (12)L + (52)(.077L).  This gives us L = 9375.  Given the optimal K/L ratio, we know that K = 722.
b)  Q = 1235