practicefinal2003

# practicefinal2003 - PART A Answer 5 of 7 questions Each...

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PART A: Answer 5 of 7 questions . Each question is worth 6 marks. Provide short, clear answers to the following: 1. How do di¤erentiated products resolve the Bertrand paradox? Explain using a graph showing the Best response functions for two …rms with identical marginal costs but producing di¤erentiated products. 1

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2. Describe the ‘lemons’ problem. 3. A risk-loving individual likes the chance of winning \$100 with 0.25 probability (and \$0 with 0.75 probability) more than taking \$25 with certainty. Graph this individual’s utility function and show the expected utility of the gamble and the \$25 with certainty. 2
4. Explain carefully under what circumstances going from uniform monopoly pricing to third degree price discrimination will lead to an unambiguous decrease in total surplus. 5. What is the di¤erence between ‘moral hazard’ and ‘adverse selection’. Provide an example of each. 3

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6. The Capital Asset Pricing Model (CAPM) provides a relationship between the expected return of an asset, r i ; the expected return of the market portfolio, r M ; the return on the risk-free asset, r f , and the ‘Beta’ of the asset, ¯ i given by E f r i g = r f + ¯ i ( E f r M r f ) In this relationship ‘Beta’ is a measure of the riskiness of the asset. How does ¯ i measure the riskiness of asset i ? Why is this an equilibrium condition for all assets? What happens for the case where E f r i g < r f + ¯ i ( E f r M g ¡ r f )? 4
7. If a bond will provide a certain payment of C = \$100 every year in perpetuity ( t = 1 ; 2 ; 3 ;::: ) as well as a one time payment of D = \$500 …ve years from now ( t = 5) , at what price, P B 0 should this bond trade today, ( t = 0) if the discount rate is r = 12%? 5

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PART B: Answer 3 of 4 questions . Each question is worth 20 marks. Be sure to explain your answer fully. Show any calculations required in order to arrive at your answer. Diagrams should be well-labeled. You may use point form in a written explanation as long as the meaning of the answer is clear. 1. The demand in a market is Q = 500 ¡ 1 2 P: A …rm (…rm 1 ) with constant marginal costs, c 1 = 200 (and no …xed costs) acts as a monopolist in this market. (a) What is the elasticity of demand at the monopoly price and quantity, P M and Q M ? (5 marks) (b) A group of competitive …rms enter the industry and produce according to the supply curve Q F = 1 2 P: Find the new equilibrium price in the market when …rm 1 acts as a dominant …rm. (6 marks) 6
(c) The group of competititors from ( b ) now coordinate to act as a single …rm, …rm

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practicefinal2003 - PART A Answer 5 of 7 questions Each...

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