FinalF05s - Econ 101 Final Solutions Alan C Marco Fall 2005...

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Econ 101, Final Solutions Alan C. Marco Fall 2005 Baseline [10] 1. [+] Assume that pens are supplied competitively. If the price of pencils falls sharply, explain what will happen to the pen market in the short run and in the long run. S-R: Demand shifts left p q L-R: exit Supply shifts left p q 2. [+] Show the deadweight loss from a binding price ±oor. Label consumer surplus and producer surplus. S D P Q Pc Qd CS PS Qs Q* DWL T/F Explain [15] Tell whether you think the statement to be true or false and explain your reasoning. 3. Cournot competition between two Frms is an example of a prisoner’s dilemma. TRUE. The monopoly outcome is the cooperative one. Each has an incentive to cheat, b/c it’s a dominant strategy. Each ²rm ends up in a worse situation, but can’t remedy it since it can’t commit to reduce quantity (it’s not credible). 4. Showing movies in a theater is an example of a congestible good. TRUE or FALSE (I took multiple answers). Congestible goods are rival and non-excludable. Movies are in a sense non-rival, but they are excludable (unless they’re publicly shown, like at a park). 1
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However, they’re only non-rival to a point. Crowded theaters are annoying (less valuable to the consumer than comfortable empty theaters). Theaters are technically excludable, but the same price is charged to matter how many other people see the movie. So, the good exhibits some of the same qualities as congestible goods like highways. 5. A price ceiling can correct the market failure arising from monopoly. [Relate your answer to marginal revenue.] TRUE A binding price ceiling (one below the monopoly price) turns a monopolist into a price-taker up until the point where price equals demand. The price ceiling then becomes marginal revenue for the Frm (like a competitive Frm).
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FinalF05s - Econ 101 Final Solutions Alan C Marco Fall 2005...

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