midterm_ans - Department of Economics University of...

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Economics 121 Page 1 Midterm Suggested Answers Department of Economics Fall 2004 University of California Woroch/Lopez/Sydnor Economics 121: MIDTERM SUGGESTED ANSWERS GENERAL INSTRUCTIONS : Write your name and your TA’s name on the front cover of each of TWO BLUE BOOKS. The exam has 3 parts. Put Parts I and II.1 in one blue book, and Parts II.2 and III in the second. Point assignments are given in the instructions for each part. The exam is worth 100 points. You may check your calculation on scratch paper but be certain to put all of your answers in the bluebooks . I. TRUE or FALSE or UNCERTAIN and EXPLAIN : Choose 4 of the following 5 statements, and decide whether each is true or false or uncertain, and then explain the reasoning behind your answer in a few sentences; if appropriate, provide a diagram. Each question is worth 8 points for a total of 32 points. 1. If the costs of producing two goods, 1 and 2, individually and jointly, are given by the cost functions: C(q 1 , 0) = 125 + q 1 2 C(0, q 2 ) = 200 + q 2 2 C(q 1 , q 2 ) = 250 + q 1 2 + q 2 2 + q 1 q 2 then there are economies of scope between the two products for all levels of production. FALSE: Economies of scope exist when the cost of producing the two goods jointly is cheaper than producing them separately: C(q 1 , q 2 ) < C(q 1 , 0) + C(0, q 2 ) 250 + q 1 2 + q 2 2 + q 1 q 2 < (125 + q 1 2 ) + (200 + q 2 2 ) q 1 q 2 < 250-325 q 1 q 2 < 75 Which signifies that economies of scope only exist for when q 1 q 2 < 75. 2. The Lerner Index increases as the number of symmetric Cournot oligopolists increases. FALSE : The Lerner index, the measure of price markups falls as additional firms enter a Cournot oligopoly. In the symmetric Cournot oligopoly, the relationship is between the markup L = (P-c)/P and the market share of an individual firm, s i . As that market share falls, so does the markup. (You are not required to remember the exact formula, but the Cournot Oligopoly markup formula is (P-c)/P = s i / η ). Intuitively, as the number of firms increases, the residual demand faced by any one firm shifts back, increasing competitive pressure and ultimately driving prices towards marginal costs. 3. In the normal form game at the rights, if 2 < X < 3 and 3 < Y < 4, then (B1, B2) is a Nash equilibrium and it is also Pareto Optimal. FALSE: It is true that (B1,B2) is the only (pure strategy) Nash Equilibrium of the game. To get full credit, you would need to show this, either by solving the game and/or explaining why it is a Nash Equilibrium. (B1,B2) is a NE because: Firm 2 A2 B2 C2 A1 2 ½ 0 2 -1 7 B1 1 -3 Y X 3 5 Firm 1 C1 4 3 5 1 -2 3
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Economics 121 Page 2 Midterm Suggested Answers - Given firm 1 plays B1, firm 2 will choose B2 (since A2 yields it a payoff of 1, C2 yields 3 and B2 yields greater than 3. - Given firm 2 plays B2, firm 1 will choose B1 (since A1 yields it a payoff of 2 and C1 yields a payoff of
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midterm_ans - Department of Economics University of...

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