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Unformatted text preview: Econ 101 UCLA Winter 2007 Name: Ml“? Version A Midterm Ll, Wednesday February 28 PRlNT CL ARLY
 This exam consists of25 multiple choice questiOns (50 points) and 5 short an5wer/graphical questions (50 points) — Clearly mark your answers to the multiple choicc questioris on the form provided and on this exam.
 Clearly write answers to the ﬁve short answer/graphical questions on this exam.
 Students may use an ordinaiy calculator (but nothing that can access the internet). Part I. 25 Multiple Choice — mark the best answer on your scantron form
1. When a profitmaximizing monopolist sells output in two distinct markets, which of the following is true? a) Price will be lower in the market For which there are fewer substitute goods.
b) Price will be higher in the market in which demand is unit—elastic. CEDPrice will be lower in the more elastic market.
d) Price will be equal in each market, as long as there is a constant marginal cost. 2) The deadwcight loss of from a single price monopolist is the result of
a) the cost of a monopolist creating excess capacity to deter entry of potential competitors
b) the lower quality of a monopolists product compared to with competition
@he inefﬁciently low quantity supplied to the market
d) the inetticiently high quantity supplied to the market 3) The Nicholson text considers a ﬁrm with total cost: TC :: g(q) + z with ﬁrm demand qd = (1(1),?) where 7. represents the
dollar amount spent on advertising and presents the formula: — H : ——e—q'—: Which ofthe following statements is true?
P4 9w
@lhe formula above only holds ifthc elasn'eity ofdemand is in the range:  00 < cw < ]
' ) lt‘ elasticity of demand is greater, ﬁrms will spend more on adverting
C) Ifthe elasticity of demand with respect to advertising spending is smaller, the ﬁrm will spend more on advertising. (1) As total revenue decreases, the dollar amount spent on advertising will increase, 2
4) The Nicholson text mentioas the Herﬁndalil' Index ofmarket concentration, H = 2a} 2 . What is the Pq
value Of this mdex for an indUSU‘Y With three ﬁrms, one with half of market sales and the other two with one quarter of
market sales each?
( a) .315?
“b75257
c) .50
d) 1.0 f§_):_1n the model ofmonopolistic competition:
@9395}: ﬂrm’s demand curve shifts leftward (and/or downward) if other ﬁrms which make similar products lower their ‘rices.
b) each ﬁrm makes economic proﬁt in the long run
c) each ﬁrm faces a horizontal demand curve
d) the product is aSSumed to be homogenous, or nondifferentiated. 6. In a zero sum game §:fa:)what one player wins, the other loses.
"b. the sum of each player‘s winnings if the game is played many times must be zero. 0. the game is fair——each person has an equal chance of winning.
d, leng run proﬁts must be zero. 1. The Prisoners‘ Dilemma is not a constant sum game because
I .
(2) some outcomes are better than others for both players.
. the prisoners’ sentences are necessarily non zero,
c. the game does not have a Nash equilibrium,
d. the sum of the prisoners” sentences is non zero, 8. A “credible” threat is a threat ofan action that a player
a. makes in a believable way.
b. is committed to carry out. (qi cannot retract.
(—9 would be willing to undertake ifin a position to do so. 9 If men earn $25 per hour and women 520 per hour then: en earn 25% more than w0men, and women earn 20% less than men. men earn 20% more than women, and women earn 25% less than men.
0) men earn 25% more than women, and women cam 25% less than men.
d) men. earn 20% more than women, and women earn 20% less than men. 10. A subgame perfect equilibrium is a Nash equilibrium that
Pa. cannot persist ﬂtrough several periods.
@iuvolves only credible threats.
(3. consists only of dominant strategies.
d. is unique. _] _l, The general message of“Folk Theorems” is that a. Nash equilibria may not be sustainable over many replications ofa game.
[i )Payoffs that are unambiguously preferred to Nash equilibria may be sustainable over many replications ofa game. Credible threats may inhibit the achievement of mutually beneﬁcial outcomes over many replications of a game. d. Just plain folk play the best games. 12.The Nash equilibrium in a Bertrand price setting game in which ﬁrms ﬁrst choose Output capacities resembles the
equilibrium in
a. the competitive model.
KB) the Coumot model.
\._ /
c. the cartel model.
d. the price leadership model. l3.A price leader in the Stackelberg model is assumed to know a. the market demand curve. b. its own cost function. ’9. its rival’s reaction ﬁJIlCLlOI]
(IdDall ofthe above. l4.Viewed from the perspective of the Stackelberg model, the Courttot solution is not a Nash equilibrium because a. each ﬁrm is not maximizing proﬁts given the othei"s output.
I; h. each ﬁrm has an incentive to take advantage of knowledge of its rival‘s reaction functiOn. ‘Uc. quantity supplied is not equal to quantity demanded at the prevailing price.
d. it is not a perfectly competitive outcome. 15A cartellike collusive solution can be a Nash equilibrium only in pricesetting games with ' a! inﬁnite replications.
. ﬁnite replications.
e. dominant strategies.
d. more than two players. 16.Whereas entry deterrence can be successful in games of perfect information only with economies of scale, in games of
imperfect information it cart succeed ifa ﬁrm can convince its rival that it has a. a dominant strategy.
b. a tough, competitive spirit. _ economies of scale. signiﬁcant ﬁnancial assets. 17, The Nicholson text clairns which ofthe following with respect to Standard Oil in the 19th century: a) Standard oil engaged in predatory pricing in order to increase its long term profits b) Standard oil engaged in predatory pricing for noneconomic reasons, even though this did not maximize proﬁts.
’6):Standard Oil likely did NOT use predatory pricing since such a strategy was not proﬁt maximizing.
Ed) Stande Oil likely did NOT USe predatory pricing since antitrust laws were vigorously enforced at the time. 18.lfa firm is a menopsonistic hirer oflabOr, (mks marginal expense for labor is greater than the market wage.
E its marginal expense for labor is equal to the market wage.
0. its marginal expense for labor is less than the market wage.
d. it is a price taker in the labor market. 19. For a monopsonistic hirer oflabor. the gap between labor’s marginal revenue product and its wage rate will be greater Fa. the more elastic the supply curve for labor. the more inelastic the supply curve for labor.
0. the more elastic the tinn’s demand for labor.
d. the more inelastic the ﬁrm’s demand for labor. 20. A monopsonist that faces a labor supply curve of the form L = 4w and has a constant marginal revenue product of 50
per unit ofL, will opt for which following, w, L combination? y j; I I H : L ‘ _hl._. __ .l .r‘. L —. I < shin2:25,. L__= 10113   ‘ . J n—
c. 50, L=200. "
d. w= 100, L —— 400. ’72 1. When an individual‘s wage rises, the substitution effect tends to
C 9 increase hours worked.
in. decrease hours worked. 0. leave hours worked unchanged. v
d, It is impossible to predict what will happen to hours worked. 22. Ifan individual’s supply oflabor curve is “backward bending,” then
a. the substitution effect always dominates the income effect.
b. the income effect always dominates the substitution effect.
{£5 1e Substitution effect dominates at low real wage levels and the income effect dominates at high real wage levels.
. the income effect dominates at low real wage levels and the substitution effect dominates at high real wage levels, 23. “Compensating wage differentials“ arise because
a. workers possess different skills. workers prefer somejobs to others.
c. firms pay higher wages for workers with higher marginal productivities.
d. ﬁrms discriminate in hiring. 24. Which of the following strategies that a union might pursue would result in the lowest wage rate for its members?
. Maximizing the total wage bill
@Naximizing employment of its members
c. Restricting union membership severely
d. Maximizing the total economic rent obtained by its members 25. Which of the following best explains why the elasticity of supply oflabor for an individual with a CobbDouglas function (for consumption and leisure) is zero?
\ a. come and substitution effects are exactly offsetting. . The elasticity of substitution of leisure for consumption is zero.
0. Leisure is an inferior good.
d. Censumption is subject to diminishing marg‘nal utility. Part I. 25 Multiple Choice — mark the best answer on your scantron form
) A ﬁrm sells its good to two distinct groups of consumers; A and B, and is able to separate them into two groups and
prevent resale between them. Demands for the two groups are given by: qA = 20 — (1/2)PA and {115 = 40 — P}; SO inverse demands are PA = 40 — 2qA and P3 = 40  qB. Total cost for this ﬁrm is TC 2 5(qA+qB) = 5Q — Find the marginal revenue for each market and set equal to marginal cost to get the proﬁt maximizing combinatiOn of qA;
(113,PA; and PB ,s r LI 3 . { 3 ~ :3” ‘1‘ ; U A rai" — “a “I? '
l'ﬂFm mu ~ «fl/5.4 a 2) w 4": ‘~ 0 ’» la ‘0 é " " ' L ‘1 " g ' ' E " “7} :7 in) “f " ’ r (If T
a [13 i“ ' a j I w  What is the elasticity ofdcmand for each group at the proﬁt maximizing qA; q“, PA; and P“? " "a ff: (7 I I ,‘ 2?? c__._.', v 1.. _'1 . “lIZQ’i’J  Does this ﬁrm earn higher proﬁt as a result of being able to price discriminate? iii 2) In the following payoffman'ix, each ﬁrm has two possible strategies (A & B), and must move simultaneously. Payof‘fs shown are (ﬁrml, firm2). Firm 2
A _ . “a
A {3,15 ' 92,2)
Firm] ’3 I  .
B 2.4 ' ‘15 Does either ﬁrm have a dominant strategy? Brieﬂy explain Does/do Nash equilibrium/a exist? If so state it/them.
Suppose each player can see the entire payoff structure, instead of only its own. How w0uld this affect ﬁrm 2?
 l \ 1T") Hm I ha". a’iawtliwi C'Wtﬁ‘: I: impMA — la" .i
_ . . J J a ‘3 . r.., r III“; it"‘l ._ I ‘ .I
l 'H‘m 3. ﬁiﬁ'r’ﬂa’litfr i'IE'f' 1.2".” r .: = .3 a
 _ i I II I if] ii“) I’E‘ii‘lﬁ‘l :” ‘ i Jr 4‘}, {a a i Z 
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n zinger: El C'rm I e I»! m l W H n W, H
i 1;! N. l 3) Two sheep herders graze their sheep on the same land (a common resource). Sheep produce wool and the amount of
wool per sheep depends on the amount of sheep grazing on the land: Wool output PER SHEEP is given by: \/(SA, S“) = 800  (SA . SB)2 so the total wool output per period for herder A is: (SA)[V(SA, Sta]. Assume each herder
makes their choice ofthe number of Sheep to bring independently ofthe other herder. Use ﬁrst order conditions to ﬁnd
the optimal number or sheep for herder A to bn'ng to the common land. Realize herder B faces the same conditions so SA
‘ 85 when both are following their best individual strategies. What is the total output of wool for each herder?  What would be the total Output of wool for each herder of both bring one fewer sheep to the coreron land (2 fewer sheep in total)? / F__ _ .'j.‘ 7, . .l 35 ' we I'mm 4f 4" 9 Qty) <‘ — ’ 3" ;. . 6"” .2.
.91] l'tlj' P: I ‘;f<L"'/)“1_.2;.: Ef' ~‘ ' "A Jt '" '— x ‘L. we". ,. I/ ' i F, 7;
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f . . xx! 1 N “n.
=3 ‘: “I “a ' 15 ‘ 516900 Jawfl fl???“ ':> ﬂirt37%} ‘._
. \ t
I .. ‘  .
.._: x, 4) Two firms face an inﬁnite period repeated game with payoffs (ﬁrmA, ﬁnnB) below: Firm B
Firm A Cooperate Cheat
Cooperate (200, 200) (350, lOO)
Cheat (350, 100) (150, 150) Assume if ﬁrm A cheats in one year, ﬁrm B will always cheat starting with the following year. That is, ifA cheats, they
will earn an ean Ell/NOW but lose 50 each year in the future, forever, starting in exactly one year from NOW.
Recall the Nicholson text measures the “discount factor” as 5 '— 1/(l+r).  For what values 0th will fum A ﬁnd it optimal to c00perate?  lfﬁrm A can either borrow or lend at 25% interest per year, should they cheat now?  ln general, would small or large valnespﬁf) be consistent with cooperation” between the firms? Briefly explain. t‘DJl‘a‘.:I;* 4'  f l 30 < (MT )5“ “'x‘ (3; ’5‘ Ig‘ 13. T7355 <1 '1': "7 . If _ n 1 ' x I‘/".. \‘u f}!
l\ 2" “a “ i ' c .._ __ H ’i A“: ' if} f‘ _
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{,5 I\ 0 Ann m; 5541‘ ,«v‘ t A [x A II ‘ HIE1. {if at A I... I. a f4? ',: IULItl lWli , i ; UJl ’l llf. a t f ‘ l ' r h r“ r l
K. I ' .a J A F n f l
mart— l“ .e th.;.‘..:~' . . :t l mm lbw J "’J J 5) Consider a labor market with one monopsonist employer that has “labor demand” that can be represented as a function:
L0 = 100 — 10(MR PL) and labor supply by the goup of all potential workers: L5 1 50w. where w is the wage rate per
period and MRPL is the marginal revenue product of labor.  How many workers would a proﬁt maximizing monopsonist employ‘ and what wage would they pay?  lfa minimum wage of2.00 is enacted, report the numerical impact on the number of individuals working. If thereis any
unemployment that results, what it the numerical amount. If there is no unemployment, explain why not.  Draw the labor supply, marginal expense oflabor MEL and “labor demand” below, showing the two situations. “ng [M ’l 7;") ' ;: z £3.19; a. / rm _ l K. _ )9 if) L 2 L L —— : r‘ _ _ 7 _ I S {J SD L } Q L _ it} _
‘“ 6 ﬂ "'“~  e"? /S “" \
W l m Y/gurfslué r \ 7 H . 5') ’(H W} ” {0/2 3 F 90;“ WWNWW‘J‘i w“ ‘H n /_ / KKK; u i1" / I" P :0 :t l‘ [t 26' ME; w "‘ 1. ?0 C 2 —_..__I———_. ...
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This note was uploaded on 04/03/2008 for the course ECON 101 taught by Professor Buddin during the Spring '08 term at UCLA.
 Spring '08
 Buddin
 Microeconomics

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