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Unformatted text preview: PADP 6950 Fertig Name ______________________________________________________ Final Exam Fall 2010 UGA 1. (10 points) I told my pediatrician's office staff that our insurance would not cover my child's vaccinations at this visit because we had hit the limit on our wellness care benefit for the year. She told me that she would charge a lower price for the vaccinations than if insurance had covered it. a. What do economists call this practice? b. Using a graph (and words), describe the effects of this practice on the pediatrician's profits and on my consumer surplus. Assume that my pediatrician is a monopolist with a horizontal MC curve and that I would not have gotten the vaccinations for my child if the price was the "insurance" price. 1 2. (10 points) Use supply and demand analysis of the cigarette market to show what happens to the equilibrium price and quantity of cigarettes in each of the following cases: (Please draw the graph in the appropriate location below.) a. Consumer income decreases (assume cigarettes are normal goods) b. The Government enacts a tax on cigarette producers; at the same time, cigarette producers begin a successful new advertising campaign. (a) (b) 3. (10 points) Fill in the blanks in the chart below. Assuming the market is perfectly competitive, what is long-run equilibrium price? $_______ Q TFC TVC TC AFC AVC ATC MC 0 2 0 2 ~ ~ ~ ~ 1 2 4 6 2 4 6 4 2 2 6 8 3 2 10 12 .67 3.33 4 4 4 2 16 18 .5 4 4.5 6 5 2 26 28 .4 5.2 5.6 10 2 4. (15 points) Consider the market for housing. To stimulate the economy in light of the current housing crisis and the economic downturn, consider 2 policies. (1) Provide all consumers with a $2000 voucher that can be used to pay their mortgage or their rent, or (2) Lower income taxes by an average of $2000 per year. (HINT: A budget line and indifference curve might help.) Which policy will have a larger effect on the non-housing sector of the economy? Why? 3 5. (20 points) Consider a monopoly with the following demand curve: P = 40 - 4Q (Note that this implies the MR = 40 - 8Q). Assume the firm's MC = 8 and ATC = 8. a. Graph the demand and marginal revenue curves as well as the marginal cost curve on the axes below. Indicate the profit-maximizing price and quantity. Calculate exact numbers also. b. How much deadweight loss occurs? (indicate on the graph only) c. What would be the perfectly competitive price and quantity, deadweight loss, and long-run profit? (calculate numbers) 4 d. We often regulate monopolies; in this case, consider regulating the monopoly by allowing the monopolist
to charge no more than $12. i. In this case, is there deadweight loss? (indicate on the graph) ii. Does the monopolist earn a profit? If so, how much? e. Next, we discover that the monopolist's production process creates hazardous pollution; it costs $4 per unit produced to clean up the pollution. In this case, what is the socially optimal price? Briefly describe a policy that would produce the socially optimal outcome. 5 6. (20 points) a. Using an Edgeworth box, draw the following scenario. Amanda and Genevieve are in a 2-person closed economy where they only consume 2 goods: cheese and oranges. Amanda initially has 10 circles of cheese and 2 oranges and Genevieve initially has 12 oranges and 1 circle of cheese. Genevieve is tired of oranges and would like more cheese. Likewise, Amanda has eaten too much cheese in the past and would prefer more oranges. Assume that they arrange a trade: Amanda gives Genevieve 4 circles of cheese in exchange for 6 oranges. Assume that this new point is Pareto efficient. Draw the indifference curves such that Amanda is the better negotiator of the two women. Make sure to indicate on your graph: i. all of the axes, ii. the Pareto inefficient initial endowment, Explain how you know this point is Pareto inefficient. iii. the Pareto efficient point, Explain how Pareto efficiency is shown graphically. iv. and how you are showing that Amanda was the better negotiator. 6 b. Does trade make the women better off? Explain. c. Compare their consumption bundles found through trade (above) to the bundle that would be achieved if the government took all of their oranges and cheese and redistributed equally among the two women. Do we know whether this redistribution is Pareto efficient? 7 7. (15 points) Specialty Docs (SD) is a small medical practice that is considering entering a market dominated by Big Box Hospital (BB). Each firm's profit depends on whether SD enters and whether BB begins to offer more of the specialty services that SD is good at. SD projects that if they enter the market and BB doesn't try to compete, then they will profit $2 million. If SD doesn't enter, it will earn $0 of course. If SD enters the market and BB offers the specialty, SD will only earn $1 million. BB has a current profit of $10 million. BB projects that if they offer this specialty, they will not earn any additional profits if SD doesn't enter the market but it will cost them $1 million in profits if SD does enter the market. If SD enters and BB doesn't offer the specialty, BB will lose $2 million in profits as they will lose many patients. a. Write down a payoff matrix (strategic form) for this game. b. BB threatens SD by saying "If you enter, we're going to offer your specialty services, so you had better stay out." Do you think that SD should believe the threat? Why or why not? c. What should SD do? Why? 8 ...
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