Final Sample Examination
Economics 101 December 6, 2007
Abstract This examination is a closed-book examination. You should not need any tools beyond a pencil or pen to write the answers. Calculators, cellphones, and other devices with memory are prohibited. Please write your answers directly on this examination paper. Don't forget to write your name and student number on each sheet (booklets occasionally do come apart in transport). You should take the amount of whitespace allocated to an answer as a hint as to the kind and quantity of answer expected. However, partial credit will be granted and you may continue answers on the back of a sheet. Continuations must be clearly marked. Do not open this examination booklet until instructed to do so.
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1. The graph in Fig. 1 is supposed to depict a monopolist with constant marginal costs. Find and explain one error in the graph. Explain what the graph should look like to be consistent with microeconomic theory. (There is at least one error.)
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D AV C
20 MC 0 0 5 10 15 20 25 30 35 40
Figure 1: Monopolist with constant MC
2. Recently spun-off Pitney Bowes Office Services Inc. (formerly the fax and copier division of Pitney Bowes Inc.) signed a contract with a Canadian firm called CGI Group to provide $25 million of IT services over 5 years. As the manager of Pitney Bowes Office Services, justify the long-term nature of the contract.
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3. Explain why automobile manufacturers make their own engines, but they purchase mirror glass from a variety of independent suppliers.
4. A firm sells its product in a perfectly competitive market where other firms charge a price of $80 per unit. The firm's total costs are C(Q) = 40 + 8Q + 2Q2 . (a) How much output should the firm produce in the short run? (b) What price should the firm charge in the short run? (c) What are the firm's short-run profits? (d) What adjustments should the firm anticipate in the long run?
5. What are the special properties of the firm's demand curve and its marginal revenue curve in the Sweezy oligopoly? Explain how these conditions lead to the conclusion that Sweezy monopolists tend to keep a constant price even though cost conditions change significantly.
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6. Recall the problem where a US firm exported into a Japanese market, and was facing a quota: "You are the manager of the only firm wolrdwide that specializes in exporting fish products to Japan. Your firm competes against a handful of Japanese firms that enjoy a significant first-mover advantage. Recently, a Japanese customer called to inform you that the Japanese legislature is considering a bill to impose a quota that would reduce the number of pounds of fish products you are permitted to ship to Japan each year." In that problem we saw that quotas at certain levels could actually increase your profit! (a) Give an example of a quota that would your decrease profit dramatically and with certainty.
(b) Using Fig. 2, explain how to identify the level of quota where your profit is the same as it currently is. Fig. 2 containing your reaction function and some of the Japanese isoprofit curves may be of use. The Japanese group's quantity is on the horizontal axis, your firm's is on the vertical axis.
7. Explain the nature of the strategic decisions made by firms in a Bertrand oligopoly, and describe the equilibrium that arises. Compare this equilibrium to the equilibrium that would obtain if the firms behaved like price-taking perfect competitors.
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Rjapan 60 Rus 40 C 20 0 0 20 40 60 80 qj 100
Figure 2: A quota on a follower. 8. It has been proposed that the electricity market should be opened up to cogeneration, which means that firms that have large power sources on-site (garbage incinerators) could use them to generate electricity and sell it to the power grid. Some proposals include a transitional phase where firms which already have onsite power generation could apply for co-generator status, but you wouldn't be allowed to build one to qualify. (a) Is there a barrier to entry in the co-generation industry? If so, what is it?
(b) Which of the oligopoly models (Bertrand, collusion, Cournot, Sweezy, contestable markets, Stackelberg) seems most appropriate for a power generation industry with co-generation? Explain your choice.
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9. For the one-shot, normal-form game in Table 1 (a) Find each player's dominant strategy, if it exists.
(b) Find all Nash equilibria, if there are any.
Player 2 strategy D E F Player 1 A 110,125 300,250 200,100 B 250,0 500,500 750,400 C 0,-100 400,300 -100,350 Table 1: A normal-form game 10. Explain how interactions between market pricing of average quality and individual sellers' knowledge of own product quality leads to the "lemons market" (market failure where high-quality items are not offered for sale, despite availability of buyers willing to pay high prices for high quality).
11. Many retailers declare the opening of the Christmas shopping season at Thanksgiving (around Nov. 25), and celebrate it with attractive sale prices on many of their products. Is this behavior consistent with peak-load pricing? If yes, explain how; if not, do you think that retailers could increase their profitability by using peak-load pricing?
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12. Recall the "chain-store" game involving an incumbent and an entrant in a market. The entrant decides whether to enter the market or not, with payoffs of 2 to the incumbent and 0 to the entrant if she stays out. If she comes in, the incumbent decides whether or not to cooperate, giving a payoff of 1 to each firm, or to engage in a price war, giving a payoff of -1 to each firm. Draw the tree diagram for this game, and explain how to compute the equilibrium by backward induction.
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