ECON 323 VELEZ TAMU FINAL EXAM

A monopoly faces a demand function Q(p)=50-p/2. Suppose that it has a constant marginal cost of 16 and no fixed costs. What is this monopoly's profit?

882

A profit maximizing monopolist faces a demand function given by Q(p)=70-p. The cost function is C(q)=5q. Suppose that the government introduces a tax of $8 per unit of output. As a result of the tax, the monopolist will?

increase price by $4.

A monopolist?

Produces a quantity that is generally less than the competitive outcome.

A monopolist?

Produces a quantity that maximizes its profits.

A monopolist faces a demand curve described by P(Q)=100-2Q and has a constant marginal cost of 16 and 0 fixed cost. If this monopolist is able to practice perfect price discrimination, its total profits will be?

1764

A price-discriminating monopolist with a constant marginal cost sells in two separate markets such that the goods from one market cannot be resold in the other. The profit maximizing price in market 1 is 4 and in market 2 is 8. If the price elasticity of demand in market 1 is -1.5, what is the price elasticity of demand in market 2?

-1.2

A monopolist faces a demand for its product given by Q(p)=3000-100p. If her cost function is given by C(q)=4q+10000, she would maximize her profits by producing [a] units of output. Her profit will be [b].

Specified Answer for: a

1300

Specified Answer for: b

6900

A monopoly:

is a firm that controls 100% of the production of a certain good.

In an imperfect competition market,

firms internalize the consequences of their pricing/production decisions.

A Nash Equilibrium is a profile of actions in which each agent is playing ________ to the other player's action.

A best response

An action, say A, for Player 1 is _______ to an action, say B, by the other player if it maximizes Player 1's payoff given that the other agent plays B.

A best response

The following problem is designed to check that you understand the definition of Nash equilibrium. Consider an integer game between two players: Marilyn and Noah. Each of the player is required to announce a positive integer. In other words, a player can announce 1, 2, 3, 4, 5..., but cannot announce "infinity". Two players announce their integers simultaneously. Notice that this game is different from the games we learned in class in that each player has infinitely many actions to take. The payoffs of the players in the game are specified as follows: (1) when the two announced integers are different, whoever reports the strictly lower number pays $1 to the other player, so that the loser of the game has payoff -1 and the winner of the game has payoff 1; (2) when the two players announce the same integer, their payoffs are both 0. This game ________.

has 0 Nash equilibrium (in pure strategies)

In the following game, the strictly dominated action for Firm 1 is:

Q=96

For a monopoly, marginal revenue is less than price because:

the firm must lower price if it wishes to sell more output.

Suppose that the market demand is given by Q(p)=1000-2p. Let p(q) be the maximal price at which the agents would buy q units. Then

p(q)=500-(1/2)q

A monopolist's marginal revenue is 0 whenever the price elasticity of demand is -1.

True

Two teenagers in souped-up cars drive toward each other at great speed.

(a) does this game have a dominant strategy (write "Yes" or "No")? [a](b) Is (Swerve, Swerve) a Nash equilibrium of this game (write "Yes" or "No")? [b](c) Is (Swerve, Don't Swerve) a Nash equilibrium of this game (write "Yes" or "No")? [c](d) Is (Don't Swerve, Swerve) a Nash equilibrium of this game (write "Yes" or "No")? [d](e) Is (Don't Swerve, Don't Swerve) a Nash equilibrium of this game (write "Yes" or "No")? [e]

No,No,Yes,Yes,

No

This problem is designed to give you practice in reading a game matrix and to check that you understand the definition of a dominant strategy.

Fill the blank:(a) if (top,left) is an equilibrium in strictly dominant strategies, then we know that: a> [a], b> [b], [c]>g, and [d]>h.(b) if (top,left) is a Nash equilibrium, then how many of the above strict inequalities must be satisfied (numeric answer, i.e., 0, 1, 2, 3, or 4)? [e](c) If (top, left) is an equilibrium in strictly dominant strategies then it must be a Nash equilibrium (write "T" if true, or "F" if false). [f]

e,d,c,f,0,T

Two hunters set out to kill a stag. One has agreed to drive the stag through the forest and the other to post at a place where the stag must pass.

(a) If you are sure that the other hunter will hunt stag, what is the best thing for you to do (write either "Hunt Stag" or "Hunt Hare")? [a](b) If you are sure that the other hunter will hunt hare, what is the best thing for you to do (write either "Hunt Stag" or "Hunt Hare")? [b](c) Does either hunter have a dominant strategy in this game (write "Yes" or "No")? [c](d) Is (Hunt Stag, Hunt Stag) a Nash equilibrium of this game (write "Yes" or "No")? [d](e) Is (Hunt Stag, Hunt hare) a Nash equilibrium of this game (write "Yes" or "No")? [e](f) Is (Hunt Hare, Hunt Stag) a Nash equilibrium of this game (write "Yes" or "No")? [f](g) Is (Hunt Hare, Hunt Hare) a Nash equilibrium of this game (write "Yes" or "No")? [g]

Hunt Stag

Hunt Hare

No,Yes,No,No,

Yes

Perfect competition increases prices compared to the monopoly outcome.

False

The following figure shows the market demand, the marginal cost function, and the marginal cost function shifted by an amount "t" for a certain monopoly. Suppose that the Government IMPOSES a sales tax of t per unit. Then the government's revenue if the monopolist maximizes the profit is?

j+k+o+r

The following figure shows the market demand, the Marginal cost function, and the marginal cost function shifted by an amount "t" for a certain monopoly. Suppose that the Government DOES NOT impose a tax. Then the DWL at the quantity and price that maximize the monopolist's profit is?

-(i+n)

A strictly dominant action produces:

a higher payoff than any other action the player can use for every possible action of the other players.

When we identify a strictly dominated action, it is reasonable to predict

the strictly dominated action will not be selected.

A monopolist

sells at a price higher than the competitive price.

A monopolist

sells at a price higher than its marginal cost at q*.

Which of the following statements is WRONG?

Under the first-degree price discrimination, social welfare is minimized.

In a local grocery store, avocado is priced "$1 each, 3 for $2". This can be viewed as a practice of ______.

Second-degree price discrimination

The ability of a monopoly to charge a price that exceeds marginal cost depends on:

price elasticity of demand

A monopoly sets a price of $50 per unit for an item that has a marginal cost of $10. Assuming profit maximization by the monopoly and utility maximization by the agents, the price elasticity of demand measured at the quantity consumed by the agents is equal to:

-1.25

A monopolist sells in two states. The demand function in state 1 and 2 respectively is Q1(p1)=50 - p1 and Q2(p2)=90-1.5p2. The monopolist produces at a constant marginal cost of 10. If the monopolist is able to price discriminate and charge different prices in the two markets, she would choose to charge p1= [a] and p2= [b].

Specified Answer for: a

30

Specified Answer for: b

35

In the following battle of sexes game, is there a strictly dominant action?

No

A monopoly faces a demand function Q(p)=50-p/2. Suppose that it has a constant marginal cost of 16 and no fixed costs. What is this monopoly's profit maximizing price?

58

A monopoly faces a demand function Q(p)=50-p/2. Suppose that it has a constant marginal cost of 16 and no fixed costs. What is this monopoly's profit maximizing quantity?

21

If we assume that strictly dominated action are not selected, then the combination that survives the iterative elimination of strictly dominated actions in the following game is?

(Q=64, Q=64)

Here, Firm A and B are two airlines. If the two airlines must decide simultaneously, which of the following statements is true?

Firm B does not have a dominant strategy

Firm A and B are two airlines. If the two airlines must decide simultaneously, what is the Nash equilibrium prediction for this game if the government offers a $30 subsidy to airlines that serve this route?

Both firms will enter and make a positive profit.

If the inverse demand function for a monopoly's product is p = a - bQ, then the firm's marginal revenue function is:

a - 2bQ

Under this more realistic assumption, consider a two-firm Bertrand competition with homogeneous goods where Firm 1 has a constant marginal cost of $2 and Firm 2 has a constant marginal cost of $3. When the two firms charge the identical price, each firm attracts half of the consumers. The market demand function is Q(p)=10-p. Which of the following is a Nash equilibrium in this Bertrand competition?

(Firm 1 charges $2.99, Firm 2 charges $3)

A landscape company in a competitive industry provides maintenance services around your house. The demand function is Q(p)=16-0.16p. The production technology has a constant marginal cost equal to $50 per hour. Each hour of service provides a marginal external benefit of $12.5 to your neighbors. What is the efficient level of services?

10

A landscape company in a competitive industry provides maintenance services around your house. The demand function is Q(p)=16-0.16p. The production technology has a constant marginal cost equal to $50 per hour. Each hour of service provides a marginal external benefit of $12.5 to your neighbors. Suppose each hour of the maintenance service produces noise that results in a marginal external cost of $12.5 to the society, which of the following statements is correct?

The equilibrium output level is efficient.

A landscape company in a competitive industry provides maintenance services around your house. The demand function is Q(p)=16-0.16p. The production technology has a constant marginal cost equal to $50 per hour. Each hour of service provides a marginal external benefit of $12.5 to your neighbors. Suppose there is no government intervention. What is the equilibrium level of output?

8

A landscape company in a competitive industry provides maintenance services around your house. The demand function is Q(p)=16-0.16p. The production technology has a constant marginal cost equal to $50 per hour. Each hour of service provides a marginal external benefit of $12.5 to your neighbors. If the government can intervene to provide the efficient level of output, what can be done?

Provide a subsidy of $12.5 per hour on this transaction to the company.

A landscape company in a competitive industry provides maintenance services around your house. The demand function is Q(p)=16-0.16p. The production technology has a constant marginal cost equal to $50 per hour. Each hour of service provides a marginal external benefit of $12.5 to your neighbors. What is the dead-weight loss because of the externality?

12.5

Consider a monopoly that has a constant marginal cost c, zero fixed costs, and faces the demand function shown in the following graph. If the government provides a production subsidy of s per unit, then the monopoly produces?

exactly q 2

Consider a monopoly that has a constant marginal cost c, zero fixed costs, and faces the demand function shown in the following graph. What is the consumer surplus if the government provides a production subsidy of s per unit?

a+b+e+f+h

Consider a monopoly that has a constant marginal cost c, zero fixed costs, and faces the demand function shown in the following graph. What is the gain or loss in welfare if the government provides a production subsidy of s per unit compared with the unregulated monopoly (this is, Welfare with subsidy - Welfare with no subsidy)?

h+i

Consider a monopoly that has a constant marginal cost c, zero fixed costs, and faces the demand function shown in the following graph. If there is no government intervention, the monopoly produces?

exactly q 1

Consider a monopoly that has a constant marginal cost c, zero fixed costs, and faces the demand function shown in the following graph. What is the total welfare if there is no government intervention?

a+b+n+e+f+g

Consider a monopoly that has a constant marginal cost c, zero fixed costs, and faces the demand function shown in the following graph. What is the consumer surplus if there is no government intervention?

a+e

Consider a monopoly that has a constant marginal cost c, zero fixed costs, and faces the demand function shown in the following graph. What is the government revenue (or deficit if negative) if the government provides a production subsidy of s per unit?

-(d+k+j)

Consider a monopoly that has a constant marginal cost c, zero fixed costs, and faces the demand function shown in the following graph. What is the total welfare if the government provides a production subsidy of s per unit?

a+b+n+e+f+g+h+i

Consider a monopoly that has a constant marginal cost c, zero fixed costs, and faces the demand function shown in the following graph. What is the producer surplus if the government provides a production subsidy of s per unit?

n+d+g+i+j+k

A monopoly faces a market demand Q(p)=1000-2p and has costs C(q)=240q. What is the DWL induced by the lack of competition in this market?

-16900

Two firms that share a market and compete in quantities (Cournot) face a demand Q(p)=2000-4p and have private costs C 1(q)=200q and C 2(q)=200q. There is a pollution cost that firms don't internalize and amounts to $100 per unit produced. What is the DWL in this market?

0

Loud music from a neighbor's party is:

a positive externality if you like the music, and a negative externality if you don't.

A monopoly faces a market demand Q(p)=1000-2p and has costs C(q)=240q. Suppose that the government intervenes the market and splits the monopoly into two firms with costs C1(q)=240q and C2(q)=240q. If the newly created firms compete in quantities (Cournot competition), then the aggregate production is?

346.67

A monopoly faces a market demand Q(p)=1000-2p and has costs C(q)=240q. What is the price set by this monopoly?

370

Two firms that share a market and compete in quantities (Cournot) face a demand Q(p)=1200-3p and have private costs C 1(q)=100q and C 2(q)=100q. There is a pollution cost that firms don't internalize and amounts to $100 per unit produced. What is the DWL in this market?

0

If there is an additional pollution cost c a per unit produced, what is the DWL in the market if the government decides to impose a specific tax collected from the producer of c (a) per unit.

-h-i-L

Relative to the Nash equilibrium in the Cournot model, the Nash equilibrium in the Bertrand model with homogeneous products ____.

results in a larger output at a lower price

A monopoly faces a market demand Q(p)=1500-5p and has costs C(q)=120q. Suppose that the government intervenes the market and splits the monopoly into two firms with costs C1(q)=120q and C2(q)=120q. If the newly created firms compete in quantities (Cournot competition), then the welfare gain or loss in the society from this intervention is?

11250

In comparing the Cournot equilibrium with the competitive equilibrium,

profit is higher, and output level is lower in Cournot.

A monopoly faces a market demand Q(p)=1500-5p and has costs C(q)=120q. Suppose that the government intervenes the market and splits the monopoly into two firms with costs C1(q)=120q and C2(q)=120q. If the newly created firms compete in quantities (Cournot competition), then the aggregate production is?

600

If there is an additional pollution cost c (a) per unit produced, what is the DWL in the market.

-L

In a Cournot duopoly, we find that Firm 1's best response function to Firm 2's output is Q1 = 50 - 0.5Q2, and Firm 2's best response function to Firm's 1 is output is Q2 = 75 - 0.75Q1. What is the Cournot equilibrium outcome in this market?

Q1 = 20

and

Q2 = 60

A monopoly faces a market demand Q(p)=1500-5p and has costs C(q)=120q. What is the price set by this monopoly?

210

A monopoly faces a market demand Q(p)=1000-2p and has costs C(q)=240q. Suppose that the government intervenes the market and splits the monopoly into two firms with costs C1(q)=240q and C2(q)=240q. If the newly created firms compete in quantities (Cournot competition), then the welfare gain or loss in the society from this intervention is?

9388.89

A monopoly faces a market demand Q(p)=1000-2p and has costs C(q)=240q. Suppose that the government intervenes the market and splits the monopoly into two firms with costs C1(q)=240q and C2(q)=240q. If the newly created firms compete in prices (Bertrand competition), then the welfare gain or loss in the society from this intervention is?

16900

A monopoly faces a market demand Q(p)=1500-5p and has costs C(q)=120q. Suppose that the government intervenes the market and splits the monopoly into two firms with costs C1(q)=120q and C2(q)=120q. If the newly created firms compete in quantities (Cournot competition), then the DWL in this market is?

-9000

A monopoly faces a market demand Q(p)=1000-2p and has costs C(q)=240q. Suppose that the government intervenes the market and splits the monopoly into two firms with costs C1(q)=240q and C2(q)=240q. If the newly created firms compete in quantities (Cournot competition) , then the DWL in this market is?

-7511.11

Constructing plastic containers produces air pollutants. Therefore, in the market for plastic containers, _____.

the marginal social cost curve is above the supply curve

Which of the following statement is WRONG?

Internalizing positive externality results in efficiency loss.

Which of the following effect is NOT considered an externality?

You drink too much coffee and cannot sleep at night.

A monopoly faces a market demand Q(p)=1500-5p and has costs C(q)=120q. What is the DWL induced by the lack of competition in this market?

-20250

The Bertrand equilibrium ____.

has zero dead-weight loss

A monopoly faces a market demand Q(p)=1500-5p and has costs C(q)=120q. What is the profit maximizing quantity for this monopoly?

450

A monopoly faces a market demand Q(p)=1500-5p and has costs C(q)=120q. Suppose that the government intervenes the market and splits the monopoly into two firms with costs C1(q)=120q and C2(q)=120q. If the newly created firms compete in prices (Bertrand competition), then the welfare gain or loss in the society from this intervention is?

20250