TF prac

# TF prac - True/False Questions for COMM/FRE 295(104 Final...

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1 True/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 QD = 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. This tax leads to economic inefficiency in Vancouver’s housing market. The price paid by the consumers including the tax is \$10. The tax revenue raised by the government is equal to \$24. The deadweight loss caused by this tax is equal to \$2. 2. The production function of a (cost-minimizing) firm is given by Q = KL + L, where K = capital units and L = labor hours. The wage rate is w = \$10/hour and rental rate of capital r = \$ 20/unit. If the firm is currently using 2 units of capital and its desired level of production is 18 units, the firm’s total cost is \$100. In this production function, labor exhibits diminishing returns. The average product of capital is always greater than marginal product of capital for all positive levels of labor employment. The K/L ratio that minimizes the cost of production is always equal to ½. 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 If there are 10 consumers with different demands the optimal user fee that will max profits must be \$5. If there are two consumers with identical demands then the optimal user fee that will max profits is greater than \$5. Whatever the demands of consumers, BBTC will maximize profits by setting a membership fee equal to the consumer surplus of the lowest demand consumer, thus attracting all consumers. Whatever the demands of consumers, BBCT will increase profit by bundling membership and games together as a package.

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2 4. Assume a firm hires a worker who has a cost of effort C = \$20,000e where 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 = .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 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 a high effort. If a bonus is to be paid only when revenue is greater than or equal to 350,000, then 60,000 is the minimum such bonus that will induce high effort. If the firm pays (1) a wage of 20,000 plus (2) a bonus of 60,000 only when revenue is greater than or equal to 350,000, then the expected profit made by the firm is 300,000. 5. Answer the following questions about a firm: A firm never wants to operate on the downward-sloping portion of its AVC curve.
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