Potential final exam questions, David Figlio

Note to class: In the case of numerical questions, I reserve the right to change the numbers, but not the problem, on the exam. There will be some, but not much, choice on the exam, so please prepare for all questions.

(1)This morning, I found a book about abnormal psychology being sold on Amazon.com for $96.25, and at the same time sold on the Amazon.uk site for the equivalent of $45. (This is not an international student edition or anything like that. It is the same book, published by the same publisher, in the same format.) What do you think is going on here?

(2)Suppose that for some item, the marginal cost of production is $5. Demand comes from two sources, students and the rest of the population. Student demand is given by the demand curve Q=7500-500P. Demand by the rest of the population is given by Q=40000-2000P. Assume that fixed costs are zero.

(a)Suppose that the monopolist can set two prices, one for students and another for the rest of the population. What prices maximize profit and what is the level of profit?

(b)Describe the conditions under which your answer to (a) could occur.

(c)Suppose that the monopolist can’t charge different prices. What single price would the firm charge then? How much lower are the profits in this case than in the case of question (a)?

(3)Describe the differences between two-part pricing and block pricing. Give an example in which you have encountered each type of pricing. In each case, tell me why you think the firm chose this form of pricing versus the other form.

(4) Your boss hired a high-priced consulting firm to estimate the demand for your product, which is sunscreen. The dependent variable of the demand equation is sales of sunscreen, by state, and the independent variables that the consulting firm used included the price of the sunscreen, the average income of residents of the state, and the number of miles of coastline in the state. The consulting firm concluded that as sunscreen is a normal good, that is, as income goes up, so does demand for sunscreen.

Can you think of any important omitted variables that might affect the ability to infer the relationship between income and consumer demand in this case? Name one of these variables, and describe how its omission might bias the estimated relationship that the consulting firm touted.

(5)What are the attributes of a successful medical experiment? Describe how the same methodology can be used in a business setting in the following situations: (1) when you are able to design an experiment ahead of time, and (2) when you want to use experimental methods to analyze some past business decision. In each case, name one potential major problem facing business analysts that would be less worrisome to medical researchers.

(6) Why are so many test marketing campaigns conducted in Omaha? Why shouldn’t your firm do this?

(7) You have estimated a demand equation for your product. Here is your set of estimated demand coefficients (assume constant marginal costs of $10):

Variable / Coefficient estimate / Standard error
Constant / 1400 / 12
Income / 20 / 4
Price of related good / 10 / 3
Advertising expenditures / 0.004 / 0.002
Sales price / -10 / 4

(a)Write the demand curve in equation form.

(b)Suppose the current value of income is 20, the current price of the related good is 30, and the current value of advertising expenditures is 10,000. What is the profit-maximizing price?

(c)Your assistant thinks that you should raise advertising expenditures to 20,000. Is this a good idea? Explain.

(8) Define, in your own words, what consumer surplus represents.

(9) You are a duopolist in a simultaneous-play market with demand Q=40-2P. Both firms have constant marginal costs of 10 per unit.

(a) What is the Nash equilibrium price?

(b) What is the Nash equilibrium profit per firm?

(c) At which range of discount rates could a “better” outcome (for both firms) be supported, assuming that the game is infinitely repeated?

(d) At which range of discount rates could a “better” outcome (for both firms) be supported, assuming that the game is played just ten times?

(10) Imagine a simultaneous-play, one-shot game between Amy and Ben. Amy can play one of three strategies, H, M or L. Ben can play one of three strategies, 1, 2, or 3. The payoff matrix of this game looks as follows:

Amy / Ben
1 / 2 / 3
H / A=6 B=4 / A=3 B=7 / A=5 B=4
M / A=2 B=3 / A=4 B=5 / A=7 B=6
L / A=9 B=7 / A=2 B=8 / A=4 B=6

(a) If this game is played simultaneously, how many Nash equilibria are there?

(b) If this game is played simultaneously, what will Ben’s payoff be?

(c) If this game is played sequentially and Amy plays first, what will Ben’s payoff be?

(11) Two players, Bob and Matt, play a sequential game. Each player plays two times, and each time has two choices. Bob’s two plays are called B1 and B2, while Matt’s two plays are called M1 and M2. When Bob plays B1, (s)he can play strategy B1A or B1B, and so on…so there are 16 possible outcomes. Their payoffs are recorded in the table below:

Case / Bob’s play in B1 / Bob’s play in B2 / Matt’s play in M1 / Matt’s play in M2 / Bob’s payoff / Matt’s payoff
1 / A / A / A / A / 5 / 10
2 / A / A / A / B / 6 / 7
3 / A / A / B / A / 8 / 4
4 / A / A / B / B / 10 / 8
5 / A / B / A / A / 2 / 9
6 / A / B / A / B / 9 / 6
7 / A / B / B / A / 4 / 12
8 / A / B / B / B / 6 / 8
9 / B / A / A / A / 6 / 3
10 / B / A / A / B / 8 / 5
11 / B / A / B / A / 2 / 8
12 / B / A / B / B / 12 / 9
13 / B / B / A / A / 8 / 6
14 / B / B / A / B / 9 / 10
15 / B / B / B / A / 5 / 4
16 / B / B / B / B / 4 / 9

(a) Suppose the order of play is B1,M1,B2,M2. What is Matt’s payoff?

(b) Suppose the order of play is B1,M1,B2,M2. Consider the equilibrium outcome. How many other cases could have made both Bob or Matt better off, assuming that Bob and Matt can pay each other.

(12) How can erratic behavior work to your advantage in bargaining? Does it matter if you’re playing the same opponent over and over again, or playing different opponents?

(13) In the early days of the copier business, Xerox had a virtual monopoly on the manufacture and sale of plain paper copiers. The technology was vastly superior to available alternatives, and some potential users were willing to pay a premium price for a copier. But Xerox encountered some resistance: Potential customers anticipated that Xerox, having sold its copiers to these high-end users at a premium price, might then cut prices for the next tier of users. Anticipating this, many high-end users waited for prices to fall. How could Xerox convince its high-end customers that it would not allow prices to fall if it saturated the high-end customer segment of its potential market?

(14) What does it mean to say that a threat is credible? Can you think of situations in which you could make a non-credible threat credible?