ECO 2145 -MICROECONOMIC THEORY II FINAL EXAMINATION

ECO 2145 -MICROECONOMIC THEORY II FINAL EXAMINATION

Subject: Economics    / General Economics   
Question
ECO 2145 – MICROECONOMIC THEORY II FINAL EXAMINATION DECEMBER 15, 2015

NOTE: You have the right to use a calculator. No reference to textbooks or other reference materials is permitted.

TRUE/FALSE (30 points). Indicate whether the statement is true, false or uncertain, and provide a one (or two) sentence explanation. Your grade is based on the quality of your explanation.

1. The capacity of a uniform-­?price monopolist (i.e., a monopoly which charges the same price to all purchasers) to earn profits superior to those of a competitive firm is determined largely by the monopolist’s greater control over its costs.

2. In a monopsonistic labour market, workers earn more than the marginal product of labour.

3. The market for blue jeans is best modeled as a market in which there is monopolistic competition.
 
4. When there is a Nash equilibria in mixed strategies, the actual payoff to each player from each of the pure strategies that is included in the mixed strategy must be the same.
 
5. In the Stackelberg model of imperfect competition, the Leader (first mover) always earns more profits than the Follower (second mover).

6. Amal has the opportunity to invest in a start-­?up. The cost of the investment is $100, the likelihood of success is 80%, in which case he will earn $1000, whereas if it fails he will lose his investment. He should definitely make the investment.
 
7. In a duopolistic market setting, in which firms engage in Bertrand (i.e., price) competition, firms earn zero profits.
 
8. Consider an economy with production. At an efficient allocation of resources in the economy, total output is maximized.
 
9. Microsoft Word is non-­?rivalrous and excludable, so the market outcome – where all consumers and firms pay the same price – is efficient.
 
10. Ocean fish stocks are in danger of collapse, due to overfishing. To discourage overfishing, all commercial fishing boats should be charged a tax of $10,000. PROBLEMS (70 points). Please solve the following problems. Each problem is worth
10 points, except for the question on general equilibrium, which is worth 20 points. Show all of your work.
 
11. A monopoly sells to ! consumers in country 1, and to ! consumers in country 2. The demand functions in each market are: ! = !! !/!!
!! produced at constant marginal cost . [1] and ! = !! !/!!
!! . Assume that output can be a. Calculate the price charged by the monopoly of it cannot price discriminate. b. Calculate the price charged by the monopoly on each market if it can price discriminate.

12. Suppose that Toyota and General Motors are the only firms that can produce a new kind of electric car. The payoff matrix below shows the firms’ profits (in millions of dollars): SAMSUNG -­?40 0 -­?40 0 ENTER 250 APPLE 250 0 DON'T ENTER 0 a.
If b
oth f
irms m
ove s
imultaneously, d
oes e
ither f
irm h
ave a d
ominant s
trategy? Explain. ENTER DON'T E NTER b. What are the Nash equilibrium when both firms move simultaneously? c. If the Japanese government commits to paying Toyota a $50 million subsidy if it enters this market, what will the Nash equilibrium be?

13. Consider a homogeneous goods market in which P = A – bQ, where Q is total market output. Suppose that there are three firms in the market, with identical constant marginal cost m and no fixed cost. Let firm a be the leader, and let firms b and c be followers. a. Find the Stackelberg equilibrium. b. How does the leader’s optimal output change when the marginal cost of production increases?

14. Amid is planning a trip and plans to spend $10,000. Amid’s utility function can be expressed as : = , where Y is the expenditure during the trip. There is a 25% chance that Amid will be robbed, and lose $1000. a. What is Amid’s expected utility? b. What is the maximum amount that Amid would be prepared to pay to insure against the loss of $1000?

15. Consider an exchange economy (breathe a sigh of relief – no production!) with ! individuals of type A and ! individuals of type B. There are two consumption goods: x, y and individuals have endowments !! , !! , !! , !! where !! denotes the endowment of good j for the type I individual. Assume that ! = !! !! and that ! = !! !! . a. Show that at a !? =
b. Let !!!
!! !!! good ; !? =
x equilibrium: ! = !!!
!! !!! be the ; !? = !!!
!! !!! numeraire. !!! !!! !!!! !!!
!!! !!! !!!! !!! ; !? = competitive !!!
!! !!! Show equilibrium, . that at a competitive . c. How does ! change if you increase the endowment of good y for persons of type A? Explain. [2] d. Show that the competitive equilibrium is Pareto efficient.

16. Consider the market for used cars, and suppose that both buyers and sellers are risk-­?neutral. Potential buyers value lemons (poor quality used cars) at $X, and good quality used cars at $Y, where Y > X. Potential sellers value lemons at $X -­? 500, and good quality used cars at $Y -­? D. The proportion of used cars which are lemons is ?. There are the same number of potential buyers and sellers of used cars. a. If information is symmetric, are both lemons and good quality cars sold? Explain. b. If information is asymmetric, and only sellers know the quality of the used vehicle, is there a value of ? for which all cars are sold? c. How does ? change if D increases? Can you interpret your result? [3]