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Mid2 Ec1 Stein S13.pdf-Econ 001: Midterm 2 (Dr. St...
Mid2_Ec1_Stein_S13.pdf-Econ 001: Midterm 2 (Dr. Stein)
Mid2 Ec1 Stein S13.pdf-Econ 001: Mi...
Mid2_Ec1_Stein_S13.pdf-Econ 001: Midterm 2 (Dr. Stein)
Page 5
need to pay rent, I am making higher profits than ever, even in the long run”. Is she
correct? Explain.
a. Answers:
Typical LR graph. See below.
Points: 7
Understanding what graphs are requested:4
Of these: 2 for industry ( show only s and d, no cost curves, no mr)
2 for firm: arc and mc
Constant price:1
P=min atc: 1
Correct shape of mc and atc:1
b. Answers:
Demand shifts out, price increases, Q increases. as P increases the demand=MP=P facing
the firm is higher, q increases. Profits.
See below.
Points: 8
Market demand shifts out: 2
P & Q bigger: 1
Demand facing the firm (or MR) higher:2
q larger=1
c. Answers:
Firms will enter the market driving price down to minATC. Each firms produces q
Points: 8
: 2
d. Answers:
The higher price of land rental pushes the costs up so now we have a higher long run price
then originally. If we assume that land is a fixed input we know for sure that each firm will
be producing more in the long run then they did originally. We cannot predict what
happens to the number of firms in the end as two opposing affects are working here: the
increased demand and the increased costs.

Page 6
Points: 7
Understanding cost increases: 2
Prl(2)=minatc(2)>minatc(1) :2
So price higher:1
Correct q: 1
Consistent Q:1
e. Answers:
Sangeeta is NOT correct the higher price of land rental has increased her opportunity cost
of using the land so that her costs have increased just like they do for Parihar above.
In the long run her economic profits will be zero after taking this higher opportunity cost
into account.
Points: 5 (too much?)
Profits in long run=zero: 2 points
Mentioning opportunity cost:3
Q2. (30 points)
We are looking for clear numeric solutions to each question. Show your reasoning and
work to receive at least partial credit in the case of numerical errors.
A military coup deposes the leader of North Korea, and the new reform-minded government
invites a team of development economists, led by you to consult on how to reform the economy.
First on the agenda is re-structuring the economy to build infrastructure to most effectively
deliver cable television to Pyongyang. Your economists estimate that the marginal cost of
delivering cable television is 0$, and that it has a fixed cost of 1,000$ to lay the infrastructure.
Furthermore, they estimate that demand is given by P = 1000 - Q and if one firm produces the
good the marginal revenue is given by P = 1000 - 2Q.
The new leader of the military junta enthuses over the wonders of the competitive
markets he has heard so much about. Find the price and quantity that would be sold in a
hypothetical competitive market for cable, and use that to explain
to the new government
why you don't think there will be a competitive market anytime soon.
Instead, you recommend giving LG Telecom, a South Korean company, exclusive rights
to supply cable services to Pyongyang. Find the price and quantity of service that LG

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