ECN 100B WQ 2025 Midterm 1 Practice Exam

1 Short answers

Answer 2 out of 3.

Please provide 2 to 3 sentences answering each question.

1.1 What is the optimal price cap for a government to impose on a monopoly? Why?

1.2 What is a potential problem that could arise when a govern-ment wants to regulate a monopoly with a price cap?

1.3 What three conditions must be met for a firm to profitably price discriminate?

2 Multi-part problems

Answer 2 out of 3.

Please answer all parts of the question.

2.1 Perfect competition question

Imagine many small farms selling usb-c charging cables on a large online marketplace, in a setting of perfect competition. Each individual firm faces costs C(q) = 3q 2 .

A. Derive a firm’s supply curve.

Now assume there are 120 firms selling usb cables on the same large online marketplace.

B. Derive the market supply curve.

Suppose the market demand curve is QD(p) = 1400 − 50p.

C. What are equilibrium price and equilibrium quantity?

D. Graph the inverse demand and inverse supply curves for the market and indicate the equilibrium price and quantity.

E. What are consumer surplus, producer surplus, and deadweight loss at the equilibrium?

Now imagine a brand new usb-d port is introduced and the entire market shifts to pro-ducing usb-d cables. Assume the number of firms are the same, demand is the same, and costs are the same except for a new fixed cost of setting up new usb-d factories that each firm faces of F C = 50.

F. What are the new equilibrium price and equilibrium quantity?

2.2 Monopoly question

Imagine a firm called Bapple that is the monopoly in the market for smartwatches, with cost-function C(Q) = 99Q2 + 20000. Imagine the inverse demand function for smartwatches is p(Q) = 2000 − Q.

A. What are equilibrium price and equilibrium quantity?

B. What is the monopoly’s profit at the equilibrium?

C. Prove that this profit level is a global maximum.

D. Show the equilibrium price and equilibrium quantity graphically. Include the inverse demand curve, firm’s marginal revenue curve, and firm’s marginal cost curve.

E. What are consumer surplus, producer surplus, and deadweight loss at the equilibrium?

Now imagine that the government decides to tax smartwatches using a specific tax of 200 per smartwatch produced and sold.

F. What are consumer surplus, producer surplus, and deadweight loss at the post-tax equilibrium? How have these quantities changed from the no-tax case?

2.3 Monopsony question

Imagine that UC Bavis is a monopoly employer of labor in the city of Bavis. Suppose the firm faces an inverse supply curve of labor of w(L) = 36 + 6L.

A. What is the marginal expenditure curve for the Bavis?

Now assume the monopsony has an inverse demand curve for labor of w(L) = 72 − 6L.

B. What are the equilibrium wage and labor quantity?

C. Show the equilibrium wage and equilibrium labor quantity graphically. In-clude the inverse demand curve and the firm’s supply and marginal expenditure curves.

D. What are Bavis’s surplus, workers’ surplus, and deadweight loss at the equi-librium?

E. Now assume the City of Bavis wants to set a minimum wage to ensure zero deadweight loss in the Bavis labor market. What should the City of Bavis set as the minimum wage?

F. What are Bavis’s surplus, workers’ surplus, and deadweight loss at the post-minimum wage equilibrium?