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TF prac soln - 90M(”12 T rue/False Questions for COMM/FRE...

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Unformatted text preview: 90M? (”12. T rue/False Questions for COMM/FRE 295 (104) Final Exam (2008) Review Session 1. A competitive housing market in Vancouver has a demand curve given by on: 20 — P. The supply is fixed at Qs = 10. To raise revenue, the government of BC imposes a tax equal to $2/unit of housing to be paid by buyers. WX :3 Q01: flay-*Cio'tg) : 1?“? 61 : I ‘ _ . ) This tax leads to economlc inefficiency in Vancouver’s housin _ Ci market. i: bft'wic “if“??? t) ”d g‘t‘i’fl? 13¢ 31?“?ng ‘ 5/ The price paid by the consumers including the tax is $10. T R {A e “A c) The tax revenue raised by the government is equal to $24. 1: 41k) 73% KEV : i ‘ gee—sew : 3% 0i) The deadweight loss caused by this tax is equal to $2. Fmfiif 3w” . -- 7/1 0 CLLR a; e E M C 5 Joe [mic Fate 51% 9V ewe-“9‘1 self 35W. less in P5 : (5'01” * 5‘" 1.1:; 2. The production function of a (cost-minimizing) firm is given by Q : KL + a? 9"” L, where K 2 capital units and L = labor hours. The wage rate is w : $10/hour and rental rate of capital r : $ 20/unit. m __ - . --‘ (-5;ng m" 5?: '/=" . W e... a 01- 3L :6 M e . t J. (Wit-:7 affai'tQ-Qi)?’ {fly k1) mgik'f’ Wee K11 mpfitb “MCI/Z] .5 M <5) Ari—1“ KL'f'L .1 kd‘i 3M1; eeee M fiLe-e .e L, . .. 0f, «’4 ézaLé-e 1‘8!“ 4“ {W125 'fdéhmT‘x . . . . ex" . Hm - J 0 \ a) If the firm is currently usrng 2 units of capital, 1ts desired level of f _. it J .- , production is 18 units 53;? g i-ri-ee‘i fa tier 6; f2)?“ .1 .117 00 \xi’_,,__ / J b} In this production function, labor exhibits diminishing returns. F 3} [14,95 ’3 ire—l ‘ The average product of capital is always greater than marginal :3) m [7 ;g (master n7- ' product of capital for all positive levels of labor employment. F L d) The K/L ratio that minimizes the cost of production is always equaltoVe- Faygg poem-(Le J; kt z; 2% 1/ 3. Suppose Bouncy Ball Tennis Club (BBTC) is proposing a new pricing scheme Where they charge a membership fee to their club and then a user fee every time a member uses a court. Let total cost, T(Q)=100,000+5Q Wale: M6: 5 fl 1 ~ 9 r flaw-wring"; awn/mac flour/W" Fair-7:7 flf’fo’} % ern Alicflfl We _ I :ng M(’ g @ngE? filJflij—gjfflgfi ft??? Pfairc‘ .. . ... a 7' :f“a;¢f ‘ .. 4‘ :- - . Wu}: Z ff“ W” 1‘32 Us at a; a! r” new ‘If there are 10 consumers with different demands the optimal user , t, («f M F a) fee that will max profits must be $5. FaLSf few 36 P ggmcw r ' We 34%!IK9’ C b) If there are two consumers with identical demands then the I: “C“ W’ #5“ ’1 (8.7:. Optimal user fee that will max profits is greater than $5. a d 9"” ”Pl/5: MC“ ) Whatever the demands of consumers, BBTC will maximize profits, 5 e by setting a membership fee equal to the consumer surplus of the VLLSQ 71’??ng [my lowest demand consumer, thus attracting all consumers. is {Heft l" C M d) “Whatever the demands of consumers, BBCT will increase profit by T M6 fl 37AM bundling membership and games together as a package. fzpfygf—{FVgfl/ e Fame ~ bandit/7 duo W?“ Walt" WA balsam/m 4. Assume a firm hires a worker who has a cost of effort C : $20,000e where “939‘,th e is effort and is either 0 or 1. The worker is risk neutral and monitoring the worker is impossible. The firm can have either good luck or bad luck (probability Bad luck 2 .50 Good luck : .50). The following is a payoff matrix showing revenue based on effort and luck of the firm. Revenue Good luck Bad luck Maximum Effort e=1 400,000 200,000 Minimum Effort e=0 300,000 100,000 :/ Kit/5 “lewd 05mm “1714 ,9 file/L wa/C’ Wartime Bit 53?): {3160;de — QOMW 5 @0000" 8:0 (Eta)? (9‘0 :0 16 f} galauy jaw/wt) if ' “ _ :3 " Q'Uflaw a? 77191 {Mum £27an Em")? £174 2 gar/aw » 0 7 ”Kg A bonus equal to 50,000 if revenue is greater than or equal to 350,000 and zero if revenue is Less than 350,000 will induce ahigh effort. T [,1 071% 1? Ca") Meta C : I .915 (ft. 0 i7) If a bonus is to be paid only when revenue is greater than or equal to 350,000, thep 60,000 is the minimum such bonus that will induce , high effort. [write 4:0,ng ,7 e m at age 7w ,mza re 4 3% 637%? C) If the firm pays (1) a wage of 20,000 plus (2) a bonus of 60,000 only Fad f6 when revenue is greater than or equal to 350,000, then the expected profit made by the firm is 300 000. 1:5 _ "2- f - fl , r5 (ma-W. : «*5. (WW) 2 WW) - :1:th»; w») «90» W a 5. Answer the following questions about a firm: c; $5562 egg ,9 f—m—H ail ) A firm never wants to operate on the downward—sloping portion of “SAW: cum]; iwfiw fit/C >MC WM!” fit/C 15 \L W” V‘ J, mm. s» ,0 :1“; m: 0 i?) If a competitive firrn's marginal cost curve is U—shaped then its short run supply curve is the upward—sloping portion of the ”if/t? [’4 6 marginal cost curve that lies above the average variable , 9"“ . cost curve. 5 KW,flV:Agfiiaf”§mm §miila€§l L,» M C) If a competitive firm's marginal costm increases with output, it“ then at the greatlpgaxipéizing output level, producer surplus be”? positive ' ‘ ‘price exceedd'average variable costs. T/{MC’ PS : KQU‘v'VflM [037 6. The following questions pertain to markets with asymmetric information. In a market with signaling, the highest quality agents choose to invest in 4) signaling. TR {4 6 19 In a market with adverse selection, the equilibrium price will be ) lower than all of the prices that would prevail in the market if _ r . J fly , if information were perfect. Fifi Z Y C” Ef“; d Fig; ((3 ,5 a W€c 911+? i i " 0‘! PL MAX PHI {0 ()1, C‘ ffflr‘r’é Signaling theory tells us that education can be valuable because T” (/f 6 it conveys information about worker quality. .. C) In a second—price, sealed bid, private—values auction, it is a a dominant strategy for each bidder to bid her true value for the i K ‘4 6 object being auctioned. _/ He (mar yaw vim/V P“? 115:0 (a / r K. h x ! l ’f—L‘“ Hf? N M ' bmeuwwM/fifif/fij 5;; (”if fifty/5y? :‘ :i ?!sz {‘3'}? ""e’ f».- y’itgk’” ‘ 3 7. The following questions pertain to the theory of choice under risk: Consider two individuals, Alice and Bob, with the same initial wealth, considering entering a lottery. 1f Alice is risk—loving and Bob is risk averse, then: a) If the lotteryis acceptable to Alice, it must be acceptable to Bob. , 7 t F0156 flair a {€21} arrema/a m 2% awn 5% c) 70 7M“? A) If the lottery is acceptable to Bob, then it must be acceptable to «In M, , ‘ 5,! Fa}? 'Afice ‘17ng gdfieliy 117?“ :5 $33.; P39: {i‘wf elf 59’s; . Z (:9? «:€// {A’é‘v ' , arm? ' a" a flr'lir/W’Wfi'p '-, C) Ahce W111 not accept the lottery unless 1t has posnive expected A? ,:-/ frat/M aw. value. Pal g6 {Orlffe ES Wfth/Aj 7:3,) g"’&fw iii-{fl fivfifl- 7‘7.) agar‘ecg file" 3 _ ‘ 0") If the lottery has positive expected value, then it is acceptable to ( v.76, I; {(5 Bob. Faéle 32+ Mfg“? ax“ mfg/117 m7; 5? a f .655} y a‘i Brier-tale“? W1 “Mg 105.16% all I331“? 8. The following questions pertain to the theory of contracts and organization " a) The hold—up problem would never occur if complete cpntracts , i . fa w at”? 5 couldbe written. Tfiuf ded~W§ gcfafit :3: 0"? t - M. U , r fiiw'i's‘im !l i"? {if W" 552 F" (X. 6L V‘ “at {#5: an??- {‘9 QT _ ‘ . r f [A #95754»: 9»?! t l 3.0“” if. Cc,” . . . , g) The hold—up problem occur! when an 1nd1v1dual 3 investment in a relationship is specific to the relationship. TR [A 6 c) Vertical integration can be used to resolve a hold—up problem.T{<U 6‘ 9. Consider a situation in which two players (R &C) play the following game simultaneously as shown in the table below: Player C Strategy C1 C2 Player R R1 6,6 lil 0 l Strategy R2 @1 C2121 éfl fl/pfik yen? K ,«r ‘ C Pl g b %2 5? "My, g? \Q 1 /0 R 5;,» [0,? X \ KEV (a, l X ,r Playing the game sequentially would: change the equilibrium to (R231) ifR moved first. File .. I :1; change the equilibrium to (R2,C1) if C moved first. F ‘75" t‘ ‘ C change the equilibrium to (R1,Cl) if R moved first. F455 < change the equilibrium to (R1,C2) if C moved first. Fa CS 5 10. Shifty Mining is a coal exploration company and has recently made a discovery of a large deposit of coal outside of the town of Econville. ACME Power has decided to enter into an agreement with Shifty Mining to buy its coal and use it to fuel a new power plant they plan on building next to the new coal deposit. The contract that the two parties Sign, however, is incomplete. El El This relationship will be exempt from the hold— —up problem if it is physically possible for ACME Power to purchase coal from another mine. FaLSf T-f ”mfg—f 1;? ’l of flirty 1",!an it .1 11/ J :1 6’ E] El Shifty Mining may try to extract rents/quasi rents from ACME Power once the power plant 15 built. TED»; Eff“ ‘f‘w 1 g1 ”'1" V704?” ””2: Cl C] The agreement between the two parties will result 1n ACME Power incurring relationship—specific sunk costs “T“ f2: {2211? § Jar Fan at“? W”? .1: 21M"? 31:31)“? éefls’clf W15: ,6" meant («0:11.36 gaztfelifu El Cl Both parties to a contract can be harmed by the incompleteness of the contract. TR (4 e I“); PdwC/i (Plan? 1495’?! 5? i150 law 5 Raw * 6:4! égfi» ladle 0T hat/L115”; (out 343,111” .3 Wdfi’lc’ C20: 11. The following 1s a game tree in sequential form for two companies (A and B) trying to decide what product their firm should specialize 1n producing (i. e air conditioners or heaters). / Air Conditioner (—3,—2) X Air Conditioner —> B _ . . " ‘yf-fflmew‘i / Heater (4,8) ti" €?Mr it " " A \ /Air Conditioner (10,3) X Heater —-—-> B\ Heater (1,4) E CI The sequential equilibrium would be A chooses Heater and B chooses Air Conditioner. FOL L5 6 Company A can ensure that B will pick Heater only if A picks Air Conditioner to start. Fdwf 8 Wrrf/ ( éyfisf'i’: A offer? by a a r A dart Company A will pick Air Conditioner to maximize its payoff. TR (4’ 9 72.1.9 fl-fiffi’f If Company B picked first the resulting equilibrium would be different. Fnge B A at) a dfinurwr‘t?‘ Sffflf‘??? if? fist)” flfimjLQ-f? 12. A monopolist has overall demand and marginal cost (MC) for its product of P=9—Q and MC=l E] El Cl C! E] El [:1 D ’ MR“: (7» g) 6g flirt/9:149"? 5" 334;) Q‘?Qfii 2) 6??” q + IP- The monopolist output and price will be Q=5 and P=4 F .. S {:51 [/56 If the monopolist could operate a two—part tariff it would be . ‘ V, ‘ [ maximizing its profit if it set P=5 Fri/r: if P: fl7f13/ c ) 67f? t m“ , If the monopolist could practice first—degree price discrimination it would sell every unit at a price in the elastic portion of the demand f n F if) curve. F772 3: (3 Cf Same 1% '(p j eat/{If 529 {b E? {fin-r” W9?!” ' a? J J r M Jr? 6.” Wt- ” We?! 9% If a new entrant came into this industry with exactly the same product as the original firm, was also able to produce with MC 2 1, and competed in prices with the original firm, the Nash equilibrium price charged to consumers would be P21, Tflu 6' Be ffAh/u/ 6?!!! iff. Kiwis-fly 13,7 13. At the local fair there is a large container of change consisting of pennies, nickels, dimes, and quarters. The container will be auctioned off using a traditional English auction format. There are hundreds of potential bidders who will be attending the auction. Each of these potential bidders has developed an estimate of the value of the coins in the container. All bidders will bid if they think they can profit from purchasing the container. E] E] The winner of the container will be the bidder with the most accurate estimate of the value of the container “2”,;ij €44 :- 29¢in Pattie. , mum/t Am ”may? eat” (1‘ P W) OWW. gag/irmvaij . .) If the auction were a sealed Second price auction it would necessarily yield a higher winning bid or tender than the English auction format. PM? “.3 fawn m: <37“; ,. a! raft? 7‘35: Qua/em Private value auctions often result in the “winner’s curse”. pa 5. x. 6’ Common value auctions often result in the“ Winner’ s curse” rfiad $97 {7; l4. Ina competitive market for widgets, the demand for widgets is Qd=24-2P and the supply is Qs=10P. Then. ¥ [at 5 N” L ([21 *9) 5:2”) 0(ng :) 22v air-rat raft-53 Ma =m 2. £2“- $0 - l .i ‘ f L; ‘ of h m 6? ’2 I, n {:5 r ”,r' Wfl€2éjffft E CI The equilibrium will be at a price where demand is Iii-ice inglfa’i/stic. Tf’g (:1 El El Government intervention keeping prices at $1 will be associated with a dead—weight loss. TX“ 6 gianlrm 9( Vila“ {C 66:71}: y D E] ‘ Overall surplus would be increased if the government required the industry to produce and sell an output of 25 units t gr 9?? (at/‘2 m {'7 716 ,L. .m- (:9 WM? f 5' FnLW Amy ,4! Ryt’rt‘ft? Grit”; fl gm,» 1:] D At the equilibrium price, consumers surplus equals $ 100. TX 01 e 15. Nick Thompson, a wheat farmer in Saskatchewan selling in a perfectly competitive market, operates with the following cost function: C(Q)— 4.5 + 6Q + 0 SQ". M: 6+& Pr: 37W 2') 6W 5’ if??? Int-W: W‘S/g, . with D? *2; an: 22911—61“): 57,29 r _.. ,g g: :2. fig? Mam W; oer-nag mt .. WW” 3 6/ Wt Ffiy}z‘l«6/€ WW WV ‘93 El El Nick earns negative profits and will eventually shut down if price is between, and remains between, 8 and 8.5. T}? a g Nick’s average fixed cost is constant at 4.5. Fa Z 5 e [ 0/ ("(5% (gm/t] If Nick’s profit maximizing choice of Q is positive and he is earning negative profits, then he must be operating at a point where his marginal cost is greater than his average total cost. Fm if _ P IfNick’s profit maximizing quantity is equal to 4, his marginal revenue is Wm M constant but his marginal cost is rising. T/i'bte MK: P t. P ; ) Qhfiéanr 16. Sky-Ride Amusements operates an amusement park with the world’s largest roller coaster ride. Sky-Ride is a monopoly. Sky—Ride has two types of customers: adults and kids. El El Selling ride tickets in bundles of twotone adult, one child) is more profitable for Sky—Ride than selling individual ride tickets if the reservation prices for adults and kids are negatively correlated. W55 Bowie-j mm; W mama-i, we?“ (mt-amen; If Sky—Ride discovers that adults and kids have exactly the same demand for rides, then no increases in profits are possible if Sky-Ride abandons an optimal two—part tariff pricing scheme in favour of a first—degree price discrimination scheme. ”WM 6 Sat" (9:: W7C are/’1 eLlC-f't’lfiir‘f tar/2’ C 3 Vii-fafflfi- 1;? X53“? £51,11‘rfl‘7 3-: F 6: Suppose Sky-Ride sets the price of a ride on Saturday 30 percent lower than the price of a ride on Sunday. This price difference must reflect a lower level of demand on Saturday compared with Sunday. its”? T46 {7/6216 attics—Mm (e Wryaf Eflglé’fi/ flaw frféaj a (59)?!“ Jf'jjgffebf‘p C (2 a PM $an Mona} /' 17. Consider the following statements about game theory. El Ci If neither of the two players in a one—shot, simultaneous move game have a dominant strategy, then a pure strategy Nash e uilibrium cannot exist. Fail-36 8-3) Emir/e 07" An Semi fan/if! D B In the Nash equilibrium of any sequential game with two players, a player is not necessarily better off if allowed to move first versus second. We a e w a. w H Mime/6” WW 1 t; ,r} 37.9 (cg/rs?“ Vfldwe [6 Hr Carr-- ‘15"? e E] CI The Nash equilibrium of any simultaneous—move game that is repeated for a sufficiently large but finite number of times (e. g. 200 consecutive months) is generally the same as the outcome that would result if the two players were able to perfectly nglgie—if if? {fa-15? .r‘ if it: (3“ {LA/[7‘9 [47‘- j , , , wffi fifhhéfrijfi g I * _ E *f / “Ely; . firfic-a El CI The following is example of a prisoners” dilemma game. Player B Right Fag ’9 Left PlayerA _, . , W0 Up @@ (fizo «TAMQ {Ir/:3; Down (50,200) (m9 000) - Wash. [5754, ,j {W 18. Bronwyn, who is risk averse at all levels of income, has $100 to invest in either mutual fund A or mutual fund B (she cannot invest in both). In one year’s time, Fund A is predictedto be worth $120 with probability 0.4 and $90 with probability 0.6. Fund B is predicted to be worth $250 with probability 0. ant} $70 with probability 0.8. ”(VI/g): #02th fl) 2/021 C | "y i if! ( ‘r POI/Bl 3 $10290) + ’3’ (70) 3 M 6 if“ saw-er. mgr E], The expected return of fund B is higher than that of Am chase-95% TKM if} El El If Bronwyn is observed to choose fund B, then either the assum tion that she is risk averse is incorrect, or she is behaving irrationally. 5t é i 6 5116 [Cd (6’) Ci $fam€eflfli flfijfzflefwflflf f/famfhgjfi‘r El D Bronwyn has diminishing marginal utility of income. . draw/gag [ask {qr/Mfg”, 1:) OZEWz’i'léiéiflt/f fig El El There is not enough information supplied with the problem to determine which fund Bronwyn should choose . T/Zv! Q 94 6 Fa re a «<2 6 wt , 2*???” Wire- MW”) ‘ (Mi 9 19. Identify whether each of the following transactions involves spot exchange, contract, or vertical integration. Spot Contract Vertical integration El E El Barnacle, Inc, has a legal obligation to purchase 2 tons of structural steel per week to manufacture conveyor frames. El El [X Exxon—Mobil uses the oil extracted from its wells to produce raw polypropylene, a type of plastic. E; El El Boat Lifts R Us purchases a generic (i.e. standard type) AC motor from a local distributor. [E El [:1 Kaspar Construction—a homebuilding contractoripurchases 50 pounds of nails from the local Home Depot. 20. COMM/FRE 295: E B Is a very fun and exciting course — can‘t wait to take more econ classes. D IE Has way too much math to be of any practical significance. 1:] El ' Should-"be banned from the face of the planet. L1 El Always brings a feeling of joy and immense satisfaction when I study it! 10 ...
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