ECON test 2

most of the test is maths and diagram questions, look over

Suppose that there are 2 identical firms in oligopoly.

Firm 1’s profit function is

π₁ = pq₁ – q₁²

Firm 2’s profit function is

π2 = pq₂ – q₂²

q₁  is Frim 1’s output level and q₂ is Firm 2’s output level.

The price function is given by

p = 6-(q₁ + q₂)

π₁ = π₂ = 2.88

Which of the following statement is WRONG?

Question 5Select one:

a.

Sellers in monopolistic competition have some market power.

b.

In oligopoly, the number of sellers cannot be more than two. 

c.

In Monopoly, the number of sellers cannot be more than one.

d.

A single-price profit-maximising monopolist always charges a price above the marginal cost of production

e.

In Monopoly, buyers are price takers.

In oligopoly, the number of sellers cannot be more than two. 

Suppose there is a profit-maximising monopolist in the market. The demand curve for the monopolist is given by P= 60 – 7Q, where P is the price for each unit of product and Q is quantity. 

What is the marginal revenue curve for the monopolist?

.

P=60-14Q

Bob is offered a job managing student dorms at Lancaster University from 9:00 am to 10:00 am every Monday morning. His reservation wage for this task is £15 per hour. 

If Lancaster university offers Bob £55 per hour to do this job, how much economic surplus will he enjoy as a result of accepting the job?

The economic surplus Bob will enjoy is £40 per hour.

Suppose that there are 2 identical firms in oligopoly.

Firm 1’s profit function is

π₁ = pq₁ – q₁²

Firm 2’s profit function is

π₂= pq₂ – q₂²

q₁  is Frim 1’s output level and q₂ is Firm 2’s output level.

The price function is given by

p = 4-(q₁ + q₂)

What are the values of q₁ and q₂ in Cournot equilibrium?

The correct answer is: q₁ = q₂ =0.8

10%                  £50

20%                  £40

70%                  -£50

 

Tom gets a lottery (shown above) for free, and he is considering whether or not he should play this lottery. If Tom plays this lottery, there will be a 10% chance that he will earn £50, a 20% chance that he will earn £40, and a 70% chance that he will lose £50. 

What is the expected value of this lottery? 

The correct answer is: -22

Which of the following statement is correct?

a.

A normal form game cannot have more than one pure strategy Nash equilibrium.

b.

We cannot use backward induction to solve any finitely repeated prisoner’s dilemma

c.

The battle of the sexes game has only one pure strategy Nash equilibirum.

d.

None of the above is correct

The correct answer is: None of the above is correct

Suppose there are two types of used cars in the market. Half of the used cars are of high quality and the other half are of low quality. But the buyers cannot verify the cars’ condition (and a mechanic is too costly). A potential buyer values high-quality cars at £9000 and low-quality ones at £4500. A high-quality car seller is willing to sell at £8000. A low-quality car seller is willing to sell at £3000. Suppose buyers are risk-neutral. Which of the following is likely to happen in the market?

a.

High-quality cars are sold at £9000 and low-quality cars are sold at £4500.

b.

High-quality cars are sold at £8000 and low-quality cars are sold at £3000.

c.

Only high-quality cars are sold at £6750.

d.

None of the above.

None of the above.

Which of the following statement is correct?

Question 19Select one:

a.

In monopoly, the monopolist and buyers are all price setters.

b.

In oligopoly, sellers and buyers are all price setters.

c.

In monopolistic competition, sellers and buyers are all price setters.

d.

None of the above statement is correct.

The correct answer is: None of the above statement is correct.

5%                  £20

20%                  £50

75%                  -£30

Tom gets a lottery (shown above) for free, and he is considering whether or not he should play this lottery. If Tom plays this lottery, there will be a 5% chance that he will earn £20, a 20% chance that he will earn £50, and a 75% chance that he will lose £30.

What is Tom’s risk attitude if he wants to play this lottery?

the correct answer is: Tom is risk loving.

Which is the following statement is WRONG?

Question 21Select one:

a.

Asymmetric information refers a situation in which one side of an economic relationship has better information than the other.

b.

The Market for Lemons (1970) model gives an explaination for moral hazard. 

c.

Adverse selection is a phenomenon under which the uninformed side of a deal gets exactly the wrong people trading with it.

d.

Moral hazard can explain why a driver in possession of a car insurance policy may exercise less care while operating their vehicle than an individual with no car insurance.

The correct answer is: The Market for Lemons (1970) model gives an explaination for moral hazard. 

Which of the following is NOT a condition necessary for profitable price discrimination?

a.

The firm must be able to identify which consumer is which

b.

The firm must compete with other firms

c.

The firm must be a price maker.

d.

Consumers must not be able to arbitrage

The firm must compete with other firms

Suppose there is a profit-maximising monopolist in the market. The demand curve for the monopolist is given by P= 20 – 3Q, where P is the price for each unit of product and Q is quantity. The marginal cost curve is MC = 2Q.

What is the optimal output level Q* for this profit-maximising monopolist?

The correct answer is: 2.50