Sample Exam 1 BSP1703 Managerial Econs PDF

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Sample Exam 1Part1: MCQ Suppose that the market for newspaper is initially in equilibrium. Further suppose that there is both an increase in the price of ink and a decrease in the price of magazines, which people may read in place of a newspaper. Which of the following accurately describes the new e...

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Sample Exam 1

Part1: MCQ 1.

Suppose that the market for newspaper is initially in equilibrium. Further suppose that there is both an increase in the price of ink and a decrease in the price of magazines, which people may read in place of a newspaper. Which of the following accurately describes the new equilibrium? a) The equilibrium price will rise; the equilibrium quantity is ambiguous. The equilibrium price is ambiguous; the equilibrium quantity will fall. c) The equilibrium price will fall; the equilibrium quantity is ambiguous. d) The equilibrium price is ambiguous; the equilibrium quantity will rise.

2.

We often think of labor as a variable cost, even in the short run. However, some labor costs may be fixed. Which of the following represents an example of a fixed labor cost? b) c) d)

a salaried manager who have a five-year employment contract an employee who is paid by the hour a temporary worker who is paid by his output none of the above

3.

In a simultaneous move game with two players, a) if neither player has a dominant strategy, we successively eliminate each player’s subordinate strategy. b) a player chooses among two or more pure strategies according to pre-specified probabilities. c) if one player has a dominant strategy and the other doesn’t, you can’t reach a Nash equilibrium. d) if both players have a dominant strategy, these constitute their Nash equilibrium strategies.

4.

Price ceilings can result in a net loss in consumer surplus when the ______ curve is _________. a) c) d)

Demand; very elastic Demand; very inelastic Supply; very inelastic None of the above; price ceilings always increase consumer surplus

5.

The likelihood of a cooperative outcome in a repeated prisoners’ dilemma type game decreases when a) b) c) d)

they value payoffs in future periods much less than they value payoffs in the current period. interactions between the players are frequent. cheating is easy to detect. the one-time gain from cheating is small in comparison to the eventual cost of cheating.

6.

d A monopolist faces inverse demand P  400  4Q and has constant marginal cost MC  80 . If this monopolist changes from a policy of uniform pricing to a policy of first-degree price discrimination, deadweight loss will decrease by: a) 0 b) 1,600 c) 3,200 d) 12,800

7.

In comparing the Cournot equilibrium with the competitive equilibrium: a) both profit and output level are higher in Cournot b) both profit and output level are higher in the competitive equilibrium c) profit is higher, and output level is lower in the competitive equilibrium profit is higher, and output level is lower in Cournot.

8.

In the Stackelberg model, there is an advantage a) to waiting until your competitor has committed herself to a particular output level before deciding on your output level. b) to being the first competitor to commit to an output level. c) to the firm with a dominant strategy d) to producing an output level which is identical to a monopolist’s output level.

Part 2: Structured Questions 9. James has the utility function U(x, y) = x(y+1). The price of x is $2 and the price of y is $1. Income is $10. a. How much x does James demand? How much y? b. If his income doubles and prices stay unchanged, will his consumption of x and y double as well?

10. China is gradually liberalizing the use of its currency, the Yuan, in international trade and finance. However, the U.S. dollar still dominates international markets as a medium of exchange and store of value. Consider trade between Renmin Trading, a Chinese company, and Peoples International, a U.S. company. If they both use Yuan to settle transactions, Renmin would get benefit of 2 while Peoples would get benefit of 1. If they both use U.S. dollars to settle transactions, Renmin would get benefit of 1 while Peoples would get benefit of 2. If they use different currencies, each would get zero benefit. a. Write the above game in normal form and find each player’s dominant strategy, if it exists. b. Find the Nash Equilibrium (or equilibria) of this game. c. If Peoples can choose the currency before Renmin, does Peoples have a first-mover advantage? What is the subgame perfect equilibrium of this game?

11. Consider an industry with 2 firms, each having marginal costs equal to zero. The inverse demand curve facing this industry is: P = 100-Q. where Q = Q1 + Q2 is total output. a. If each firm behaves as a Cournot competitor, what is the equilibrium price and quantity? b. Calculate the collusive (cartel) output and profit for the industry. c. If firm 1 behaves as a follower and firm 2 behaves as a leader, calculate the Stackelberg equilibrium output of each firm.

Solution key: MCQ: BADB ACDB

9. a. From the utility function U(x,y) = x(y+1) we have U(x,y) = xy+ x. Then MUx = y+1, MUy = x The optimal choice of x and y should satisfy the condition that the marginal utility per dollar spent on either good is the same, or: MUx/Px = MUy/Py Thus: (y+1)/2 = x The budget constrain suggests that 2x+y=10. Plug in x= (y+1)/2, then y=4.5, x=2.75 b. If his income doubles, the budget constrain becomes 2x+y = 20. The optimal condition still follows that (y+1)/2 = x. Now the optimal choice is x =5.25, y =9.5. The new bundle does not double.

10. a. Peoples Renmin

U.S. Dollar

U.S. Dollar 1,2

Yuan 0,0

Yuan

0,0

2,1

For either of the player, there is no dominant strategy. b. Nash Equilibrium is (US Dollar,US Dollar) and (Yuan, Yuan)

c. If Peoples is a first mover, the best strategy for the two companies is both of them use U.S. Dollar. This is the subgame perfect equilibrium. From the above form, it can be seen that Peoples gets more benefit(2) than Renmin(1). In contrast, if Renmin is a first mover, it can get more benefits(2) than Peoples(1). Hence, Peoples has a first-mover advantage.

11. a. Cournot competition: we first derive the reaction function for firm 1:

P = 100  Q1  Q2  TR1 = 100  Q12  Q1Q2  MR1 = 100  2Q1  Q2 MR = MC  100  2Q1  Q2 = 0  Q1 = 50 

Q2 2

Similarly firm 2’s reaction function is:

Q2 = 50 

Q1 2

The cournot equilibrium is where the two reaction functions intersect:

Q1 2 = 25  Q1  Q = 100 1 2 4 3

50  Q1 = 50 

As the two firms are symmetric, Q2 = 100/3 and Q = 200/3 , hence market price

P = 100  200/3 = 100/3

b. If they form a cartel, they will act as a monopoly and then split the profit: P = 100  Q  TR = 100Q  Q 2  MR = 100  2Q MR = MC  100  2Q = 0  Q = 50, P = 100  Q = 50

 = 50 * 50 = 2500

c. As firm 1 is the follower, it will maximize its profit given firm 2’s decision Q 2 , the reacion function is the same:

Q1 = 50 

Q2 2

Now for firm 2, it takes into account firm 1’s reponse when setting the quantity, that is:

P = 100  Q = 100  (50 

TR2 = P * Q2 = 50Q2 

Q Q2  Q2 ) = 50  2 2 2

Q22  MR2 = 50  Q2 2

To maximize it profit, firm 2 will set MR = MC , or

50  Q2 = 0  Q2 = 50 From the reaction function of firm 1:

Q1 = 50 

Q2 = 25 2...