BECO 3310-005
Final Exam
All questions worth twenty (20) points.
- Consider a small college town with a single movie theater.
a. Graph the market for movies in this town. Label clearly the equilibrium price and
quantity, as well as other relevant areas. Assume the movie theater treats all customers
the same. Also assume constant marginal costs.
b. Now suppose the theater can distinguish between customers. - There are two kinds:
students and adults. On a new graph, show the separate demand conditions for
students and adults. Assume the (constant) marginal cost of providing a seat in the
theater is the same for both groups.
c. Would the theater charge the same price to students and adults? Why or why not?
d. Which scenario, a. or b., is more efficient? Why? - Consider the market for luxury yachts. Assume the market is competitive.
a. Graph the market, assuming demand is more elastic than supply. Label clearly the
equilibrium price and quantity.
b. Now suppose the government institutes a per-unit tax on buyers of luxury yachts. How
does this affect the market? Show in your graph.
c. Who bears the larger share of the tax burden, buyers or sellers? How do you know?
d. In light of your answers to parts a. through c., evaluate the following statement: “Taxes
on luxury goods are a good way of making the rich pay their fair share.” - True or false, with explanation: “A firm can be making positive economic profit and negative
accounting profit at the same time.” - True or false, with explanation: “Market competition allocates property rights to their highest valued uses.”
- Acme Corporation is the sole firm servicing the market for widgets. This is a closed market: no
new entrants are permitted. Furthermore, Acme has patented a novel technology that allows it
to manufacture widgets at zero marginal cost. However, fixed costs are positive.
a. Graph the market for widgets. Label clearly the equilibrium price and quantity.
b. At Acme’s profit-maximizing quantity of output, what is the price elasticity of demand?
How do you know?
c. Suppose there are several prospective firms who would like to enter the widget industry
to compete with Acme. How much would Acme be willing to spend on lobbying the
government to keep the market closed? How do you know?
