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Eco 304 Fall 2011 MT3 White_edit

Eco 304 Fall 2011 MT3 White_edit - Midterm 3 Economics...

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Midterm 3: Economics 304k (Sibley) White Version December 2, 2011 Directions: 1. Observe the Honor Code. 2. There are five questions. Do all five . 3. Each counts 20 points. 4. Do all your work on the exam. 5. Don’t start until told to do so.
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1. The following questions involve Section 1 of the Sherman Act. An industry consists of two firms, imaginatively called X and Y. (a) The CEOs of X and Y meet and agree to set their prices each at $5.00. However, the market price, which had been $2.00 prior to the agreement, remained at $2.00 because X and Y both cheated on the agreement. Are X and Y guilty of violating Section 1? Why or why not? (b) X and Y do not explicitly collude, but use tit-for-tat strategies. The market price is at the monopoly level most of the time. Are X and Y guilty of violating Section 1? Why or why not? (c) There is a general severe depression, with widespread unemployment. X and Y agree not to compete on price and to set prices at a reasonable level above cost so as to avoid having to lay off workers in such a bad economic environment. Have X and Y violated Section 1? Why or why not?
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