ECON 301 FINAL: Wednesday 5th May 2004, 12.45 – 2.45 p.m.
- Please be in your seats five minutes before the exam starts so that we can start on time. You will have the full 120 minutes to complete the exam
- I will provide the test booklet and the Scantron. You need to bring a calculator, a pencil, a pen and a ruler with you.
- The test is open book. You may bring the required text, your class notes, and your homeworks with you. Although you will have your material with you, be sure to prepare for the test – materials are for back-up purposes only. When answering the questions, be aware that you should manage your time carefully!
- The test will comprise two sections: Section 1 will consist of 30 multiple choice questions, each worth 2 points. Section 2 will comprise 5 short answer/problem questions, and will be worth 100 points in total.
- The final exam will cover all course material, but will heavily emphasize the material discussed since the second mid-term. Thus, the material discussed up to the second mid-term will account for 40 points (out of the possible 160 points). The material discussed since the second mid-term will account for 120 points (out of 160 points).
- I am not including sample questions from the earlier part of the course, as you already have review questions, and the actual exams.
- Please contact me if you have any questions at all.
REVIEW SESSION #2: Thursday 29th April, 2004
- Please visit the book’s website for additional study questions at:
- The answers to the multiple choice questions are highlighted in bold.
- The answers to the short problems will follow – have a go at doing them first!
Sample Multiple Choice Questions
1.The maximum price that a consumer is willing to pay for each unit bought is the ______price:
a.market
b.reservation
c.consumer surplus
d.auction
e.choke
2.A tennis pro charges $15 per hour for tennis lessons for children, and $30 per hour for tennis lessons for adults. The tennis pro is practicing:
a.first-degree price discrimination.
b.second-degree price discrimination.
c.third-degree price discrimination.
d.fourth-degree price discrimination.
e.fifth-degree price discrimination.
3.Suppose that the marginal cost of an additional ton of steel produced by the Japanese is the same whether the steel is set aside for domestic use or exported abroad. If the price elasticity of demand for steel is greater abroad than it is in Japan, which of the following will be correct:
a.The Japanese will sell more steel abroad than they will sell in Japan.
b.The Japanese will sell more steel in Japan than they will sell abroad.
c.The Japanese will sell steel at a lower price abroad than they will charge domestic users.
d.The Japanese will sell steel at a higher price abroad than they will charge domestic users.
e.Insufficient information exists to determine whether the price or quantity will be higher or lower abroad.
4.When a monopolist engages in perfect price discrimination:
a.the marginal revenue curve lies below the demand curve.
b.the demand curve and the marginal revenue curve are identical.
c.marginal cost becomes zero.
d.the marginal revenue curve becomes horizontal.
e. none of the above.
5.An amusement park charges an entrance fee of $75 per person, then $2.50 per ride. This is an example of:
a.first-degree price discrimination.
b.a two-part tariff.
c.second-degree price discrimination.
d.bundling.
e.tying.
6.Use the following two statements about monopolistic competition to answer this question:
I. In the long run, the price of the good will equal the minimum ofthe average cost.
II. In the short run, firms may earn a profit.
a.I and II are true
b.I is true, II is false
c.I is false, II is true
d.I and II are false
7.Which of the following is true for both perfect and monopolistic competition:
a.Firms produce a differentiated product.
b.Firms face a downward sloping demand curve.
c.Firms produce a homogeneous product.
d.There is freedom of entry and exit in the long run.
e. Marginal revenue is less than the price.
8.In the Cournot duopoly model, each firm assumes that:
a.rivals will match price cuts, but will not match price increases.
b.rivals will match all reasonable price changes.
c.the price of its rival is fixed.
d.its rivals will charge the perfectly competitive price.
e.the output level of its rival is fixed.
9.A _____ shows how much a firm will produce as a function of how much it thinks its competitors will produce:
a.contract curve
b.demand curve
c.reaction curve
d.Nash equilibrium curve
e.none of the above
10.Two firms operating in the same market must choose between a collusive price and a cheat price. To read this payoff matrix, Firm A's profit is listed before the comma,B's profit after the comma. If each firm tries to choose a price that is best for it, regardless of the other firm's price, which of these statements is correct:
Firm BCheat Price / Collude Price
Firm A / Cheat Price / 18, 18 / 30, 6
Collude Price / 6, 30 / 24, 24
a.Firm A should charge the collude price, Firm B should charge a cheat price.
b.Firm A should charge a cheat price, Firm B should charge a collude price.
c.Both firms should charge a collude price.
d.Both firms should charge a cheat price.
11.General equilibrium analysis differs from partial equilibrium analysis in that it:
a.explicitly takes feedback effects into account partial equilibrium analysis does not.
b.does not take into consideration specific problems, but partial equilibrium analysis does.
c.takes into consideration specific problems, but partial equilibrium analysis does not.
d.allows one to arrive at a specific conclusion, but partial equilibrium analysis does not.
e. ignores the fact that firms could cheat on collusive agreements.
12.From a point inside the utilities possibilities frontier:
a.movement to another point within the frontier can only increase one person's utility, but not both people's utility.
b.it is possible to find another point within the frontier that generates higher utility for both people.
c.it is possible to find another point within the frontier that involves higher output of both goods.
d.any move to another point within the frontier will necessarily decrease someone's utility.
e. everyone is doing the best they can, given their initial endowments.
13.Irrespective of the amount of chips and pretzels that Sam consumes, his marginal rate of substitution of chips for pretzels is 2. Also, irrespective of the amount of chips and pretzels that Sally consumes, her marginal rate of substitution of chips for pretzels is 3. Suppose that Sam is initially allocated 3 chips and 3 pretzels, whereas Sally is initially allocated 6 chips and 10 pretzels. Which of the following statements is true:
a.This allocation is Pareto optimal.
b.This allocation is not Pareto optimal as Sally and Sam have unequal amounts of each good.
c.The allocation is not Pareto optimal as Sally would be willing to exchange two pretzels for one chip and be better off, without making Sam worse off.
d.The allocation is not Pareto optimal as Sam would be willing to exchange one pretzel for two chips and be better off, without making Sally worse off.
e.All of the above.
14.The Edgeworth box illustrates possibilities for Karen and James to increase their satisfaction by trading goods. If point A gives the initial allocation of food and clothing, a movement into the shaded area:
a.leaves Karen better off, but James worse off.
b.leaves James better off, but Karen worse off.
c.leaves James and Karen worse off.
d. leaves James and Karen indifferent about trading.
e.leaves James and Karen better off.
15.If the initial distribution of labor and capital is Pareto optimal, which of the following is true:
a.It is possible to reallocate labor and capital across industries so as to increase the production at least one good.
b.It is possible to reallocate labor and capital across industries so as to increase the production of one good without decreasing the production of another goods.
c.It is possible to reallocate labor and capital across industries so as to increase the production of one good, but only by reducing the production of another good.
d.It is possible to reallocate labor and capital across industries so as to increase the production of every good.
e.none of the above.
16.Externalities:
a.are not reflected in market prices, so they can be a source of economic inefficiency.
b.do become reflected in market prices, so they can be a source of economic inefficiency.
c.are not reflected in market prices, so they do not adversely affect economic efficiency.
d.do become reflected in market prices, so they do not adversely affect economic efficiency.
e.may or may not become reflected in market prices, but do not have an impact on economic efficiency in either event.
17.The marginal benefit and marginal private cost curves for tuna are given as follows:MB = 200– Q; MPC = Q. In addition to private costs, there is a marginal external cost of $10 per unit of output. What is the efficient level of output:
a.0
b.50
c.95
d.100
e.none of the above
18.Which of the following is a negative externality connected to attending college:
a.The fact that completion of a college degree acts as a signaling mechanism to employers.
b.The fact that other costs, such as books and materials, are incurred in addition to tuition and fees.
c.The fact that your college has required that all individuals living in student housing either get or show they have already obtained vaccinations against all communicable diseases.
d.The fact that the people in the next room are on a totally different biological clock and play music you can't stand at hours you want to sleep.
e.The fact that you will get benefits from college that you don't currently anticipate.
19.When emissions are measured on the horizontal axis, the marginal cost of abating emissions is:
a.downward-sloping because emissions become more and easier to eliminate once the firm makes the initial commitment to do so.
b.downward-sloping because a high level of emissions is cheap to attain, and a low level of emissions is expensive to attain.
c.upward-sloping because emissions become easier to eliminate once the firm makes the initial commitment to do so.
d.upward-sloping because a high level of emissions is cheap to attain, and a low level of emissions is expensive to attain.
e.horizontal because the technology to remove emissions is assumed constant.
20.If households pay a fixed annual fee for trash disposal:
a.households will all tend to produce the same amount of garbage.
b.households have no incentive to cut back on the amount of garbage they generate.
c.that fee will provide households with an incentive to cut back on the amount of garbage they generate.
d.that fee will discourage households from throwing out reusable materials.
e.that fee will discourage households from throwing out toxic or otherwise harmful materials.
Sample Short Answer/Problem Questions:
Question 1: Price Discrimination
Part A: The local zoo has hired you to assist them in setting admission prices. The zoo’s managers recognize that there are two distinct demand curves for zoo admission. One demand curve applies to those ages 12 to 64, while the other is for children and senior citizens. The two demand and marginal revenue curves are:
PA = 9.6 – 0.08QA
MRA = 9.6 – 0.16QA
PCS = 4 – 0.05QCS
MRCS = 4 – 0.10QCS
where PA = adult price, PCS = children’s/senior citizen’s price, QA = daily quantity of adults, and QCS = daily quantity of children and senior citizens. Crowding is not a problem at the zoo, so that the managers consider marginal cost to be zero.If the zoo decides to price discriminate, what should the price and quantity be in each market? Calculate the firm’s total revenue in each sub-market.
Part B: Suppose consumers are identical. Will an optimal two-part tariff be less efficient (create more deadweight loss) than perfect competition. Illustrate your answer.
Part C: Numerous restaurants offer discounts to customers who ear dinner between 4 – 6 p.m. (oftencalled “early bird” specials). Can you explain why this is a form of third-degree price discrimination and how themarket is being segmented?
Question 2: Monopolistic Competition/Oligopoly
Part A: Suppose that the market demand for mountain spring water is given as P = 1200 – Q, where MR = 1200 – 2Q. Mountain spring water can be produced at no cost.
a.What is the profit maximizing level of output and price of amonopolist?
b.What level of output would be produced by each firm in a Cournotduopoly in the long run if the firms are identical (symmetric)? What will the price be? Note MR1 = 1200 – 2Q1 – Q2; MR2 = 1200 – 2Q2 – Q1.
c.What will be the level of output and price in the long run if this industry were perfectly competitive?
Part B: At its current output level of 10, a monopolistically competitive firm has MR = 4, MC = 4, AC = 6, and P = 8. Is this market in long-run equilibrium? If not, describe the adjustment process necessary to achieve long-run equilibrium?
Part C: The two leading U.S. manufacturers of high performance radial tiresmust set their advertising strategy for the coming year. Each firmhas two strategies available: maintain current advertising orincrease advertising by 15%. The strategies available to the twofirms, G and B, are presented in the payoff matrix below.The entries in the individual cells are profits measured in millionsof dollars. Firm G's outcome is listed before the comma, Firm B'safter the comma.
Firm BIncrease Adv. / Maintain Adv.
Firm G / Increase Adv. / 27, 27 / 50, 12
Maintain Adv. / 12, 50 / 45, 45
Which model is best suited for analyzing this decision?Why? (Remember it is illegal to collude in the United States). Carefully explain the strategy that should be used by each firm.
Question 3: General Equilibrium
Part A: Consider a potential, voluntary exchange between two people. Assume that both people have complete information about each other's preferences and that there are no transaction costs. Consumers A and B have between them 9 units of X and 15 units of Y. Initially, A has 6 of X and 10 of Y, and B has 3 of X and 5 of Y. Consumer A's marginal rate of substitution of X for Y is 2 and B's marginal rate of substitution of X for Y is 1/3. Is there room for a mutually beneficial, voluntary exchange? Draw an Edgeworth box. Determine which consumer would trade for more X and which consumer would trade for more Y. If trade takes place, can you explain the terms of trade? (the range of prices between which trade will take place)
Part B: What is the necessary condition for cost minimization for a firm that buys inputs in competitive factor markets? Explain why a competitive equilibrium in factor markets is an efficient allocation in the production Edgeworth box. If the amount of productive resources available for use in an economy were to increase, what would happen to the production possibilities frontier?
Question 4: Externalities
Part A: The market for paper in a particular region has the following supply and demand curves:QD = 160,000 - 2,000P; QS = 40,000 + 2,000P,where Q is measured in hundred-pound lots, and P is price per hundred-pound lot. There is currently no attempt to regulate the dumping of effluent into streams and rivers by the paper mills. As a result, dumping is widespread. The marginal external cost associated with the paper production is given by the expression:MEC = 0.0002Q.
a.Calculate the competitive price and output, assuming that noattempt is made to monitor or regulate the dumping of effluent.
b.Determine the socially optimal levels for price and output. If your answers in (a) and (b) are different, explain the source of thedifference.
- Sketch a diagram showing the costs or benefits to society ofallowing the market to operate in an unregulated fashion.
Part B: “There is no need for government intervention when positive externalities are present because no one is being harmed”. Discuss the validity of this statement.