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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 (costminimizing) 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'tQQi)?’ {ﬂy k1) mgik'f’ Wee K11 mpﬁtb “MCI/Z] .5 M <5) Ari—1“ KL'f'L .1 kd‘i 3M1; eeee M ﬁLee .e L, . ..
0f, «’4 ézaLée 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 iriee‘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 ﬂawwring"; awn/mac ﬂour/W" Fair7:7 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 (maW. : «*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 Briertale“? 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 Tf ”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 _ .
. " ‘yffﬂmew‘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 ﬂﬁfﬁ’f If Company B picked ﬁrst the resulting equilibrium would be different.
Fnge B A at) a dﬁnurwr‘t?‘ Sffﬂf‘??? if? fist)” ﬂﬁmjLQf? 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? {finr” 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. Kiwisﬂy 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=242P and the supply is Qs=10P. Then. ¥ [at 5 N” L ([21 *9) 5:2”)
0(ng :) 22v airrat raft53 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 Iiiice 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??? IntW: W‘S/g, . with D? *2; an: 22911—61“): 57,29 r _.. ,g g:
:2. ﬁg? Mam W; oernag 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. SkyRide Amusements operates an amusement park with the world’s largest roller
coaster ride. SkyRide 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 Bowiej mm; W mamai,
we?“ (mtamen; If Sky—Ride discovers that adults and kids have exactly the same demand for rides, then no increases in proﬁts are possible if SkyRide abandons an
optimal two—part tariff pricing scheme in favour of a ﬁrst—degree price
discrimination scheme. ”WM 6 Sat" (9:: W7C are/’1 eLlCf't’lﬁir‘f tar/2’ C 3 Viifafﬂﬁ 1;? X53“? £51,11‘rﬂ‘7 3: F 6: Suppose SkyRide 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. Fail36 83) 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? {fa15? .r‘ if it: (3“ {LA/[7‘9 [47‘ j , , , wfﬁ ﬁfhhéfrijﬁ g I * _ E *f / “Ely; . ﬁrfica
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“ sawer. mgr
E], The expected return of fund B is higher than that of Am
chase95% 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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