Sample Exam 2 BSP1703 Managerial Econs PDF

Preview

Summary

Sample Exam 2Part1: MCQ Identify the false statement. a) As output increases the difference between a firm’s average total cost and average variable cost curves cannot rise. b) Whenever a firm’s average total costs are rising as output rises, average variable costs must be rising too. c) If a firm e...

Description

Sample Exam 2 Part1: MCQ 1.

Identify the false statement. a) b) c)

2.

Suppose the equilibrium price of milk is $3 per gallon but the government sets the market price at $4 per gallon. The market mechanism will force the milk price back down to $3 per gallon unless the government: a) c) d)

3.

As output increases the difference between a firm’s average total cost and average variable cost curves cannot rise. Whenever a firm’s average total costs are rising as output rises, average variable costs must be rising too. If a firm employs only one variable factor of production, labor, and the marginal product of labor is constant, then the marginal costs of production are constant too. If labor obeys the law of diminishing returns, and is the only factor of production used by the firm, then at every output level short-run average variable costs exceed marginal costs.

rations the excess demand for milk among consumers. buys the excess supply of milk and removes it from the market. Both A and B are plausible actions. The government cannot maintain the price above the equilibrium level.

Consider the following statements when answer the question I. When a competitive industry’s supply curve is perfectly elastic, then the sole beneficiaries of a reduction in input prices are on consumers. II. Even in competitive markets firms have no incentives to control costs, as they can always pass on cost increases to consumers. a) I and II are true. I is true, and II is false. c) I is false, and II is true. d) I and II are false

4.

Which of the following statements about natural monopolies is true? a) c) d)

Natural monopolies are only found in the markets for natural resources (like crude oil and coal). For natural monopolies, marginal cost is always below average cost. For natural monopolies, average cost is always increasing. Natural monopolies cannot be regulated.

5.

A monopolist has set its output to maximize profit. The firm’s marginal revenue is $20, and the price elasticity of demand is -2. Then the firm’s profit maximizing price is approximately: a) b) d)

$10 $20 $40 cannot be answered without knowing the marginal cost.

6.

Suppose in a particular production process that capital and labor are perfect substitutes so that three units of labor are equivalent to one unit of capital. If the price of capital is $4 per unit and the price of labor is $1 per unit, the firm should a) employ capital only. employ labor only. c) use three times as much capital as labor. d) use three times as much labor as capital.

7.

When the price faced by a competitive firm was $50, the firm produced nothing in the short run. However, when the price rose to $100, the firm produced 100 tons of output. We can then infer that: a) The firm’s marginal costs of production was less than $100. b) The firm’s total cost of producing 100 tons is less than $10,000. c) The firm’s marginal costs of production never fall below $50. The minimum value of the firm’s average variable cost lies between $50 and $100.

8.

Consider the following statements when answer the question I. When a competitive industry’s supply curve is perfectly elastic, then the sole beneficiaries of a reduction in input prices are on consumers. II. Even in competitive markets firms have no incentives to control costs, as they can always pass on cost increases to consumers. a) I and II are true. I is true, and II is false. c) I is false, and II is true. d) I and II are false

Part 2: Structured Questions 9. A Cournot oligopoly has 4 identical firms, and inverse market demand P=60-Q. All firms have marginal cost, MC=20. What is the equilibrium price, quantity by each firm, and profit at the industry level?

10. Consider the following coordination game

Player T 1 B

L 2,2 -1,-1

Player 2 R -1,-1 1,1

(a) Calculate all the pure strategy equilibria of this game (b) Suppose that Player 1 moves first, are the strategies you described in (b) subgame perfect equilibria of this game?

11. A retailer is considering two promotion strategies for selling a new product: 25%-off discount or “4-for-3” (buy three and get a fourth free, i.e., pay the amount of money for three units and get another unit free.) Use demand curve Q=16-2P, and original price P*=4. a. Which method is more effective in promoting sales? Show by computing the equilibrium quantity sold under each pricing scheme. b. If the retailer offers both promotions, which one is more desirable for consumers?

Solutions: MCQ: DBBB CBDB

Structured Questions: 9. For firm 1, the residual demand is: 𝑃 = 60 − 𝑄1 − (𝑄2 + 𝑄3 + 𝑄4 ), thus the marginal revenue is: 𝑇𝑅1 = 60𝑄1 − 𝑄12 − (𝑄2 + 𝑄3 + 𝑄4 ) ∗ 𝑄1 => 𝑀𝑅1 = 60 − 2𝑄1 − (𝑄2 + 𝑄3 + 𝑄4 ) We obtain firm 1’s reaction function by setting MR=MC, or 60 − 2𝑄1 − (𝑄2 + 𝑄3 + 𝑄4 ) = 20 => 𝑄1 = 20 − (𝑄2 + 𝑄3 + 𝑄4 )/2 If we repeat the same exercise for firm 2,3 and 4, we can get: 𝑄2 = 20 − (𝑄1 + 𝑄3 + 𝑄4 )/2 𝑄3 = 20 − (𝑄1 + 𝑄2 + 𝑄4 )/2 𝑄4 = 20 − (𝑄1 + 𝑄2 + 𝑄3 )/2 Add the four reaction functions together: 𝑄1 + 𝑄2 + 𝑄3 + 𝑄4 = 20 ∗ 4 − (𝑄1 + 𝑄2 + 𝑄3 + 𝑄4 ) ∗ 3/2 Then 𝑄 = 𝑄1 + 𝑄2 + 𝑄3 + 𝑄4 = 32 Because firms are symmetric, so each firm produces 8 units, P=60-Q=28. Each firm earns a profit of (28-20)*8=64, total industry profit is 64*4=256.

10. (a) pure strategy NE: (T,L) and (B,R)

(b) if Player 1 moves first, we can present the game in extensive form: backward induction generates the only subgame perfect equilibrium is: (T,L)

(2,2) L T

R

B

L

(-1,-1)

Player 1 (-1,-1)

R (1,1)

11. a. At P*=4, Q*=16-8=8 With 25% off discount: P’=3, Q’=16-6=10 With “4-for-3”: the benefit for consumers to consume the 4th unit is P=(16-4)/2=6. So the benefit of 4 units are: (6+8)*4/2= 28>12 The benefit for consumer to consume the 8th unit is P=(16-8)/2=4. So the benefit of another 4 units (second package) is (4+6)*4/2=20>12 The benefit for consumer to consume the 12th unit is P=(16-12)/2=2. So the benefit of a third package is (2+4)*4/2=12=12 Consumers will purchase 3 packages (12 units) under the 4-for-3 promotion. So this is more effective in promoting sales. b. 25% off discount: P=3, Q=10. CS=(8-3)*10/2=25 4-for-3: CS=60-36=24 Hence the 25% off is a better deal....