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Unformatted text preview: 1 Fall 2009 Economics 121B: Industrial Organization PRACTICE MIDTERM 1 Answer Keys October XX, 2009 ( 9:00-9:50 a.m.) Part I Short Answer Questions (Total 40 points) (Please write your answers in 3-5 sentences.) 1 . (10 points) When we want to measure economic performances of a market, there are mainly two criteria available, efficiency and technical progress . Briefly explain each and compare them. Answer : Efficiency is referred to as the condition to Pareto optimality, i.e., the optimal resource allocation given technology. Technical progress means the development of new technologies and products that makes industry more efficient in generating new knowledge that saves resources in producing goods and services. Compared to efficiency, which looks at static , one period at a time market performance, technical progress looks at dynamic , long term market consequences. 2 . (10 points) When economists model oligopoly, there are two widely-used models, the Cournot model and the Bertrand model . Briefly explain each of them. Answer : In a Cournot model, each oligopoly firm chooses its output (or quantity). In a Bertrand model, each oligopoly firm chooses its price. 3 . (10 points) In U.S. antitrust laws and policies, there are two distinctive approaches for identifying unreasonable restraints of trade, the per se rule and the rule of reason . Briefly explain each of them. Answer : The per se rule is essentially saying that just proving the existence of some specific actions is enough for conviction; no cost-benefit analysis are needed. The rule of reason needs to look to the inherent effect and evident purpose (or intent) to convict a firm. 4 . (10 points) Evaluate the following statement. (Choose between True or False, with explanations. Answers without explanations will receive zero credit.) If inverse market demand curve is linear (like P = a b Q ) and a monopolist has a constant average and marginal cost C > 0, then the profit-maximizing quantity that the monopolist chooses to produce will always be the half of the quantity produced in a perfectly competitive market with the same demand curve and the same average and marginal cost. Answer : True. Setting P = MC for the perfectly competitive market and MR = MC for the monopolist will give b C a Q c !...
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