Reference no: EM132168323
SECTION A
Multiple Choice ANSWER ALL QUESTIONS (Each question is worth 1 point). Choose the one alternative that best completes the statement or answers the question
1. Who is your lecturer?
(a) Owen
(b) Kristian
(c) Monica
(d) Marian
(e) Scott
2. The price elasticity of bananas is -3 when the percentage increase in price is 20%. What is the corresponding % decrease quantity demanded?
(a) -60%
(b) -30%
(c) -20%
(d) -10%
(e) None of the above
3. Suppose that in the market of bananas, quantity demanded is represented by Qd = 100 2p, and quantity supplied is represented by Qs = 2p + 4. If the government provides a subsidy of $2 per banana, which if the following is correct?
(a) Bananas price fall by $1 and 2 more bananas will be sold
(b) Bananas price will fall by $1, and 2 fewer bananas will be sold
(c) Bananas price will rise by $18 and 2 more banana will be sold
(d) The change in price will depend on whether the subsidy is given to the producer or the consumer
(e) None of the above
4. If setting fines to drunk drivers has marginal external benefit of $400 then:
(a) Drunk-driving is a positive externality
(b) The government should conduct breath test to all drivers
(c) An equilibrium without government intervention will lead to too many drunk drivers on the road
(d) The marginal social benefit equals the marginal social cost of drunk-driving
(e) A equilibrium without government intervention will lead to too many drunk drivers being fined
5. Which of the following is true?:
(a) There is deadweight loss in a perfect price-discriminating monopoly market
(b) A Pareto optimum where total surplus is maximised is never a fair outcome
(c) The total surplus in a perfect price-discriminating monopoly market is the same as in a competitive market
(d) Consumer surplus is not reallocated to producers if a perfect competitive market turns into a price-discriminating monopoly market
(e) Total surplus is higher in a perfect competitive market than in a perfect price- discriminating monopoly market.
6. Consider the liquor industry in Sydney and Melbourne. Assume that the market is perfectly competitive in both cities and liquor producers in Sydney and Melbourne face the same costs. Demand in Melbourne is relatively inelastic compared to demand in Sydney. The Commonwealth government introduces a tax of t in both markets. Which statement is true in the long run?
(a) The deadweight loss created by the tax is larger in Sydney than in Melbourne; the reduction in quantity is larger in Sydney than in Melbourne.
(b) The deadweight loss created by the tax is larger in Sydney than in Melbourne; the reduction in quantity is larger in Melbourne than in Sydney.
(c) The deadweight loss created by the tax is larger in Melbourne than in Sydney; the reduction in quantity is larger in Sydney than in Melbourne.
(d) The deadweight loss created by the tax is larger in Melbourne than in Sydney; the reduction in quantity is larger in Melbourne than in Sydney.
(e) None of the above.
7. In the movie The Invention of Lying, the characters are unable to lie. Imagine also that consumers are also unable to keep quiet when asked about their willingness to pay. Under this scenario, a perfectly price-discriminating monopolist facing a demand curve p=60-q and a constant marginal cost of 20 will have profits equal to:
(a) 0 (b) 1600 (c) 2400
(d) 800 (e) 1200
8. Select the correct answer:
(a) In perfect competition there are no economic profits in the long-run
(b) In the short-run in perfect competition firms might operate at a loss
(c) In the short-run in perfect competition firms might have positive profits
(d) In the long-run, the market supply is perfectly elastic
(e) All of the above are true
9. Select the incorrect answer:
(a) In a perfect competition there are many firms, low barriers to entry and no power to set the price
(b) in a monopoly there is one firm, high barriers to entry and power to set the price
(c) In monopolistic competition there are few firms, high barriers to entry, and power to set the price
(d) In an oligopoly there are few firms, high barriers to entry, and power to set the price
(e) We have seen how game theory can be used to solve a oligopoly market interaction
10. In a perfectly competitive industry, each firm has a total cost function of TC = 400 + 10q + q2 and a marginal cost curve of MC = 10 + 2q if it produces a positive quantity of output q. The market price is $50. Which statement is true?
(a) Each firm produces 20 units of output; the industry will require entry to reach its long-run equilibrium
(b) Each firm is producing 25 units; as the firm is making short-run profits the industry is not at its long-run equilibrium
(c) Each firm produces 20 units of output; the market is in its long-run equilibrium
(d) Each firm is producing 20 units; the firm will continue producing in the short run but will consider exiting in the long run as it is not covering its total costs of production
(e) Each firm is producing 25 units; the firm is covering its variable costs, but making a short run loss
11. The prisoner's dilemma is a two-person game illustrating that:
(a) If you try to cheat in an exam you might have to go to prison with your friend
(b) The cooperative outcome could be worse for both people than the Nash equilibrium
(c) Even if the cooperative outcome is better than the Nash equilibrium for one person, it might be worse for the other person
(d) Even if cooperation is better than the Nash equilibrium, each person might have an incentive not to cooperate
(e) Rational, self-interested individuals will naturally avoid the Nash equilibrium be- cause it is worse for both of them
12. Which of the following statements is true?
(a) A public good is non-rival but excludable
(b) Public transport is a public good
(c) A public good is non-rival and non-excludable
(d) A public good is rival and excludable
(e) A public good is rival but non-excludable
13. Consider a cold war scenario below in which South Reach and North Reach have nuclear weapons that can destroy each other in one battle. South Reach was the first to build these weapons and has to decide whether to attack or not attack. North Reach has to decide after South Reach whether to retaliate (attack back) or not. If South Reach does not attack North Reach in the first place, a peace treaty (P) is also an option. Payoffs of South Reach are shown first and the game is depicted in the tree diagram below. Which of the following statements is true?
(a) North Reach will not retaliate if South Reach attacks
(b) The equilibrium payoff is (-1500, -200)
(c) The equilibrium payoff is (-100, -150)
(d) The equilibrium payoff is (-50,-100)
(e) None of the above
14. Assume we have an upward sloping supply curve and a downward sloping demand curve of kale. Now assume the following two events occur:
(i) Growers of kale receive good rainfall leading to a record harvest.
(ii) The price of spinach, a substitute for kale increases because of a fungal disease called spinach blight.
Which of the following most accurately describes what happens in the market for kale?
(a) The equilibrium price will be higher, but the new equilibrium quantity could be higher or lower
(b) The equilibrium price change is ambiguous, and the new equilibrium quantity will be lower
(c) The equilibrium price change is ambiguous, and the new equilibrium quantity will be higher
(d) The equilibrium price will be lower and the new equilibrium quantity will be lower
(e) None of the above
15. Consider the payoff matrix associated with price setting behaviour by two supermarkets, ALID and Poles. ALID payoffs are listed first and Poles' payoffs are listed second. If ALID and Poles make their choice simultaneously, which of the following is true:
in $trillions Poles Poles
Low price high price
ALID low price (-20,-50) (40,0)
ALID high price (-10,40) (20, 70)
(a) The unique Nash equilibrium is for ALID to price low and Poles to price high
(b) The unique Nash equilibrium is for ALID to price high and Poles to price low
(c) The unique Nash equilibrium is for ALID to price high and Poles to price high
(d) The unique Nash equilibrium is for ALID to price low and Poles to price low
(e) None of the above.
16. Assume that the domestic supply curve of bananas is given by p=20+q and the demand for bananas is given by p=80-q. Further, assume that bananas can be imported and the world price for bananas is equal to 20. If the government imposes a tariff of 10 how much tariff revenue will be collected?
(a) 100
(b) 200
(c) 300
(d) 400
(e) None of the above
17. Assume that the demand and supply curve for an illegal painkiller is given by the follow- ing: p=500-2Qd and p=80+4Qs
If the government legalises it and imposes a ceiling price of 300, then we would expect:
(a) An excess supply of 20
(b) An excess demand of 20
(c) An excess supply of 30
(d) An excess supply of 30
(e) None of the above
18. Select the false statement:
(a) A price floor is a minimum price the government sets for a particular good
(b) A price floor is non-binding when set at a level lower than the competitive market price
(c) A binding price floor might increase producer surplus
(d) Government interventions are justified by fairness and competitive market failure
(e) A non-binding price ceiling is a maximum price set at a lower price than the perfect competitive market price
19. Australia and Lilliput have the same amount of workers. Each worker can produce mi- crochips and marmite according to the following production schedule (in millions of units):
|
|
Microchips
|
Marmite
|
|
Australia
|
12
|
6
|
|
Lilliput
|
2
|
4
|
(a) Australia has an absolute advantage in the production of microchips and a compar- ative advantage in the production of marmite
(b) Australia has an absolute advantage in the production of marmite and a comparative advantage in the production of microchips
(c) Lilliput has an absolute advantage in the production of microchips and a comparative advantage in the production of marmite
(d) Lilliput has an absolute advantage in the production of marmite and a comparative advantage in the production of microchips
(e) None of the above
20. Assume that the supplier of official English exams to access the university as a foreigner student is a monopolist with constant average total cost equal to $15. The demand curve faced by this monopolist is given by the following: p=50-q. Suppose that the monopolist can set a two-part tariff. If so, they should set the per unit price equal to and the fixed fee equal to
(a) 25; 1225
(b) 25; 612.5
(c) 15; 1225
(d) 15; 612.5
(e) None of the above.
SECTION B
B1
The cost curve for a typical perfect competitive firm in the coffee market is given by the following:
TCi = 128 + 4qi + 2qi2
The market demand curve for coffee is given by the following:
P = 84 - 2q
(a) (i) Find the long run competitive equilibrium. That is, identify the equilibrium price and quantity, output for each firm, the number of firms in the industry and the level of producer and consumer surplus. Show your answer in a clear well-labelled diagram.
(ii) What is the value of own price elasticity of demand at the market equilibrium? Is demand elastic or inelastic?
(b) (i) Assume now that the government imposes a specific tax of 8 on sellers. Find the new market equilibrium. That is, identify the equilibrium price and quantity, output for each firm, the number of firms in the industry and the deadweight loss associated with the tax.
(ii) Show the outcome for individual firms in a well labelled diagram. Also, show the market equilibrium in a separate well labelled diagram
(c) Suppose that there is a natural disaster affecting all the coffee crops except one producer who now acts as a monopolist. Find the market equilibrium (price and quantity) in the absence of any tax
B2
Paul owns a lawyer firm in a small isolated town in New Mexico called "Better call Paul." He finds that he has two types of clients, those who are often in trouble or "naughty" clients (n) and those who are not as often in trouble or "good clients." The demand curve for each type of individual is given by the following:
Naughty: qn = 50 - pn Good: qg = 40 - pg
where qn and qg represent the number of cases demanded to be solved by the different customers.
(a) Assume that in his office, the average and marginal cost of solving each case for Paul is constant and equal to 10. He can also tell straight away when a client comes in whether s/he a naughty or good type. If Paul is the only lawyer in town and acts as a monopolist:
(i) What price strategy maximises his profits? How is this type of behaviour called?
(ii) What are Paul's total profits, price charged and quantity sold? And consumer surplus? Draw the outcome in a well-labelled diagram.
(iii) Calculate the elasticity at the market equilibrium
(b) Paul decides to switch to an online service. As a result, his new marginal cost is zero. Paul has also figured out that he can identify the IP address of the computer and thus the exact location of the client who is requesting his services. With that information, he can backtrack their exact criminal record. Thus, Paul can now perfectly identify the exact willingness to pay for his services.
(i) How is this type of behaviour called?
(ii) What will in this case be his profit-maximising choice of price and quantity for his naughty and good clients? What is the value of the total profits earned by Paul? and consumer surplus? And deadweight loss? Show your answer in a well-labelled diagram.
SECTION C.
Consider the market of Tim Tams in Australia (a small country). The world price of Tim Tams is $5.
The quantity demanded in Australia is qd = 40 - 2p The domestic supply is qs = 2p
where p is the price of Tim Tams
(a) i) Calculate the Australian the equilibrium price, quantity, consumer surplus and producer surplus under autarky (no trade).
ii) Suppose that after Brexit, Australia removes a ban on international trade of Tim Tams made in the UK (the rest of the world). With the aid of a well-labelled diagram, calculate the new equilibrium price, the quantity consumed and the quantity supplied by domestic producers.
iii) Calculate the change in consumer surplus and producer surplus from i) to ii). Is the original ban of international trade in Tim Tams efficient? Why or why not?
(b) After the Australian government has removed the ban on international trade, it then implements an import tax (tariff) of $2. Again, with the help of a well-labelled diagram,
(i) calculate the new quantity demanded, quantity supplied domestically, and
(ii) the new consumer surplus, producer surplus and government revenue following the imposition of the tariff.
(c) The government, instead of the import tax, considers implementing a $2 per unit pro- duction subsidy for domestic producers. What are the new consumer, producer surplus, and the cost of the subsidy to the government?
(d) You are hired as an economic consultant by the Australian government. What is your ranking of the three alternative policies outline in parts a) ii, b, and c (that is free trade, a tariff and a production subsidy)? Why?