1. business and industrial
2. company
3. earnings

MICROECONOMICS
PROFESSOR VASILIKI SKRETA
SAMPLE MIDTERM
Name + ID:__________________________________________
Microeconomics Spring 2008
TAs Name:___________________________________________
Sample Final Exam
Instructions: The use of class notes, textbooks is not permitted. Please
write legibly; you will receive credit for the parts of your work that are
legible. Read the questions carefully and provide concise but justified answers. SHOW ALL YOUR WORK.
Good
Luck!
April
22, 2008
1. Short Questions.
PPart I:Short Answer Questions
2.
Questions.
1. Long
M RS(x
for y) =
M RS is the slope of____________________________
2. RT S(L for K) =
RT S is the slope of_____________________________
3. RP T (x for y) =
RP T is the slope of_____________________________
4. True or false, motivate. When nominal wage increase, workers are always better of.
5. True or false, motivate. The marginal rate of substitution is –in general –not constant
along the indi¤erence curve.
1
1
Short-answer questions for sample final (Microeconomics)
1.
Using a diagram, show the implications for a consumer’s preferences of an
indifference curve being convex.
2.
Using indifference curve analysis, explain how we can determine whether two
goods are complementary goods or substitute goods.
3.
True, false, motivate. Price elasticity of demand is constant at all points along
a linear demand curve.
4.
Using a diagram, explain the relationship between average product and
marginal product.
5.
True, false, motivate. Labor productivity can increase if there are
improvements in technology, even though any given production process
exhibits diminishing returns to labor.
6.
A firm faces the following total cost function: TC (Q ) = Qi2 − 4Qi + 80 ,
where Qi is its output. Calculate average variable cost, fixed cost and marginal
cost.
7.
Using algebra to motivate your answer, explain the relationship between
marginal product and marginal cost?
8.
True, false, motivate. Stating that a firm is experiencing economies of scale is
the same as stating that it is experiencing increasing returns to scale.
9.
How can we measure the extent to which a firm enjoys economies of scope?
10.
Using a diagram, show why a perfectly competitive firm will maximize profit
by producing a level of output at which marginal revenue equals marginal
cost.
11.
The government wants to impose a tax on luxury yachts. Using a diagram,
explain who is most likely to bear the burden of the tax (i.e. the buyer or the
seller).
12.
Suppose that the government imposes a $1.00 tax on tobacco. The current
demand function is Qd = 200 – 60P and the current supply function is Qs = 60
+ 40P. Calculate the price paid by the buyer (Pb), the price received by the
seller (Ps) and the equilibrium quantity of tobacco (Q) after the tax has been
imposed.
13.
Explain what is meant by the Lerner index.
14.
Assume a monopolist faces a marginal cost of 7 and a price elasticity of
demand for its product of -3.0. According to the ‘rule of thumb for pricing’,
what price should the monopolist charge for its product?
15.
Identify three problems involved in measuring market power using the Lerner
index.
16.
Using a diagram, explain how monopoly power creates a deadweight loss.
17.
Using a diagram, explain what is meant by a natural monopoly. Give an
example.
18.
Explain what is meant by monopsony power. How is it related to elasticity of
supply?
19.
Distinguish between first-degree, second-degree and third-degree price
discrimination.
20.
Using an example to motivate your answer, show why a strategic move in
game theory must be credible.
21.
Explain what is meant by the Bertrand game (sometimes called the Bertrand
trap or paradox).
22.
An NYU professor at Stern can receive $75 per hour with 100% probability
for teaching an MBA course. He will obtain a utility of 19. Alternatively, he
can teach undergraduates on a performance-related basis with a 50%
probability of earning $50 per hour (and utility of 12) and a 50% probability
of earning $100 per hour (and utility of 22). Assuming the professor is riskaverse, which job will he take?
23.
Explain what is meant by the ‘lemons problem’. Give an example.
24.
Describe two ways in which producers can provide high-quality goods when
the presence of asymmetric information has the potential to drive out their
goods from the market.
25.
Explain what is meant by market signaling. Give an example.
26.
Describe how an incentive scheme can be used to solve a principal-agent
problem.
27.
Explain what is meant by the Coase Theorem.
28.
Explain what is meant by the ‘tragedy of the commons’.
29.
Describe the two characteristics of a public good. Give an example of a public
good.
30.
Give an example of a negative externality. Describe an economic solution to
the problem.
MICROECONOMICS
PROFESSOR VASILIKI SKRETA
SAMPLE MIDTERM
Name + ID:__________________________________________
Microeconomics Spring 2007
TAs Name:___________________________________________
Final
Exam
Instructions: The use of class
notes,
textbooks is not permitted. Please
write legibly; you will receive credit for the parts of your work that are
legible. Read the questions carefully and provide concise but justified answers. SHOW ALL YOUR WORK. Good Luck!
April 22, 2008
PPart I:Short Answer Questions
1. M RS(x for y) =
1
M RS is the slope of____________________________
Question
1. Suppose that U M BRELLA corporation faces market demand function
2. RT S(L for K) =
Qd = 500 − 2P
RT cost
S is the
slope isof_____________________________
Its
function
T C = 30 + 4Q. The U M BRELLA corporation is a monopolist
since it holds the patent on “mobile rain avoidance devices”.
2. What are the U M BRELLA corporation’s fixed cost, variable costs, average costs and
3. marginal
RP T (x for
y) =Does the U M BRELLA cost function have economies or diseconomies
costs?
of
RPscale?
T is the slope of_____________________________
3.
willmotivate.
it choose When
to produce
andwage
whatincrease,
will be the
market
for umbrellas?
4. How
True much
or false,
nominal
workers
areprice
always
better of.
4.
consumer
surplus
the monopoly
5. What
True orisfalse,
motivate.
Theatmarginal
rate of price?
substitution is –in general –not constant
along the indi¤erence curve.
5. Suppose that U M BRELLA corporation can perfectly price discriminate (first degree
price discrimination). How much will is produce? How much will its profits be?
1
6. Suppose now that a second firm enters the umbrella industry with the same costs
as the first firm with a separate patent for Umbrellas. What will be the equilbrium
prices and quantities, if both firm’s choose quantities simultaneously? (Cournot
Competition).
7. Now assume that the first firm gets to choose quantity before the entrant. What are
the quantities that these firms will produce and the price in the market (Stackelberg
Competition). Why are these quantities different?
2
Cournot, Monopoly and Price Discrimination
Suppose that U M BRELLA corporation faces market demand function
QD = 100 − 10P
Its cost function is T C = 10 + 5Q. The U M BRELLA corporation is a monopolist since it
holds the patent on “mobile rain avoidance devices”.
1. How much will it choose to produce and what will be the market price for umbrellas?
2. What is consumer surplus in the case of monopoly.
3. Suppose that the market for umbrellas is composed of an island with two sides, a side
with rain forest and a desert side. Demand for umbrellas on the rain forest side is:
QRF = 50 − 2P
while the demand on the desert side is:
QDE = 50 − 8P
The U M BRELLA corporation can price discriminate between these two markets.
What will be the prices and quantities in the Rain Forest and Desert market? Why
are these prices different?
4. Compute total consumer surplus and producer profits when the U M BRELLA Corporation can price discriminate between Rain Forest and Desert markets. How are
these different from the case where there is no price discrimination?
2
5. Suppose now that a second firm enters the umbrella industry with the same costs
as the first firm with a separate patent for Umbrellas. However, these two firms
CANNOT discriminate between the Rain Forest and Desert markets. What will be
the equilibrium prices and quantities, if both firm’s choose quantities simultaneously?
(Cournot Competition).
3
Cost of Production and Externalities
There are 2 technologies for producing electricity: coal and nuclear power. The cost functions for both of these technologies are (where Q is in Megawatts):
2
Coal
C(Q) = 5Q + Q
10
2
Nuclear C(Q) = 15Q − Q
20
The demand curve for electric power (in Megawatts) is:
QD (p) = 200 − 10p
1. What are the fixed costs, variable costs, marginal costs and average variable costs of
both Coal and Nuclear Power.
2. Does Coal have economies of scale? Does Nuclear Power have economies of scale?
3. Suppose a regulator wanted to control the price for Coal. What price should this regulator choose to maximize producer and consumer surplus? Draw a graph illustrating
producer and consumer surplus and compute these quantities.
4. Suppose a regulator wanted to control the price for Nuclear Energy. What price
should this regulator choose to maximize producer and consumer surplus? How is
this different than the case with coal?
5. Now we turn to a competitive market for electricity produced using coal. There are
10 producers with the cost function:
Ci (qi ) = 5qi +
qi2
8
Burning coal causes air polution. The total cost of air pollution due to coal is:
P ollution = 10Q
(a) What is the amount of electricity produced by a competitive market?
3
(b) How much electricity would a regulator want there to be produced?
(c) What is the deadweight loss of the competitive (unregulated market)? Just draw
a graph to illustrate and label it appropriately.
4
Crime, Choice Under Uncertainty and Game Theory
1. A 16 year old is deciding between several different job prospects after dropping out of
high school.
Option 1: Drug dealing
Salary: $48, 400
Probability of jail
0.6
Option 2: Carjacking
Salary: $19, 600
Probability of jail
0.3
Option 3: McDonalds
Salary: $9, 025
Never go to jail
This 16 year old girl has utility:
√
U=
X
where X is her income. Here we also assume if you get caught and go to jail, you will
earn zero income.
(a) What is the Expected Income of each option?
(b) What is the Expected Utility of all 3 options and which one would you recommend she choose (from an economic perspective)?
(c) What is the lowest salary McDonalds could offer that would keep her from engaging in a life of crime?
Suppose these is a market for ”Jail Insurance ” which casts $5,000 a year and a pay
of $10,000 if you go to jail.
(d) What will the youth pick?
(e) Where are the profits (losses) of the insurance company (assume here that the
insurance company is risk-neutral)?
(f) Would you think that the government should ban jail insurance?
4
Suppose two gangs (Bloods and Crips) can engage in either drug dealing (D), carjacking (C), or prostitution (P ). Their payoffs are the following (in thousands of
dollars)
Crips
D
C
P
D (−10, −10)
(20, 5)
(20, 2)
Bloods C
(5, 20)
(−10, −10)
(5, 2)
P
(2, 20)
(2, 5)
(−10, −10)
Drug dealing is the most profitable, followed by carjacking, followed by prostitution.
If they do the same activity, a gang war ensues, causing them to lose -$10,000.
(g) Determine all of the Nash equilibria and Dominant strategies.
(h) What if the Bloods move first? What is the (Sub-game Perfect) Nash Equilibrium
of this new game?
5
Asymmetric Information in Online DVD Market
Suppose that there’s a market for DVDs on the internet, where there are two sellers Amazon.Com and DVDCorp. DVDs can be good or scratched. Consumers want to pay
$10 for a good DVD whereas $3 for a scratched one. Consumers are risk neutral.
Assume that Amazon.Com’s marginal cost of producing a DVD is $7 - there’s 90%
chance that it’s good, while with 10% chance it’s scratched. DVDCorp’s marginal cost
of producing a DVD is $5.50 - it’s either good or scratched with equal probability i.e.,
50% chance for each.
1. How much would a consumer want to pay for a DVD from Amazon.Com or DVDCorp?
2. Now, suppose that sellers go through eBay and we cannot tell anymore that who’s
selling a particular disc. Amazon.Com and DVDCorp sell the same numbers of DVD’s
on Ebay.
(a) What would a consumer be willing to pay for a DVD on Ebay.
(b) What would a consumer be willing to pay for a DVD on Ebay if Amazon’s costs
of producing a DVD rise to $ 8 per DVD?
5
3. Now, assume that Amazon.Com can offer the possibility of a money back guarrentee.
So it will refund the purchase price of a DVD if it is scratched.
How much a does a customer value an Amazon.Com DVD now? Suppose that Amazon.Com charges the consumer their full valuation. What is the expected revenue and
cost per disc to Amazon.Com because of this new warranty policy?
4. Suppose, DVDCorp also introduces a similar warranty policy. Compute the consumer’s expected valuation of a DVDCorp disc and the company’s cost and revenue
per disc.
5. Based on (c) and (d) determine who will offer a warranty and what will be the prices
of DVD in a warranteed as well as a non-warranteed market.
6
CEO Compensation
1. As Chairman of the Board of UMBRELLA Industries you estimate that your firm’s
annual profit is given by the table below. Profit (π) is conditional upon market
demand and the effort of your new CEO. The probabilities of each demand condition
occurring are also shown in the table.
Probabilities
Profit if Low Effort
Profit if High Effort
Low Demand
0.2
5M
6M
Medium Demand
0.5
6M
7M
High Demand
0.3
7M
8M
You must design a compensation package for the CEO that will maximize the firm’s
expected profit. While the firm is risk neutral, the CEO is risk averse. The CEO’s
utility function (in terms of total wealth (W) and effort level (E) either 0 or 1) is :
1
U (W, E) = W 2 − 50E
This implies that exerting high effort, or E = 1 costs the CEO 50 utiles.
You know the CEO’s utility function, and both you and the CEO know all of the
information in the preceding table. You do not know the level of the CEO’s effort
at time of compensation or the exact state of demand. You do see the firm’s profit,
however.
Of the three alternative compensation packages below, which do you as Chairman of
UMBRELLA Industries prefer and why?
6
PACKAGE 1:
PACKAGE 2:
PACKAGE 3:
50 percent of any
Pay the CEO a flat salary of $500,000 per year.
Pay the CEO a fixed 5 percent of yearly firm profits.
Pay the CEO a flat salary of $450,000 per year and then
firm profits above $7 million.
(a) If the CEO choose PACKAGES 1, 2 or 3, will she choose high or low effort?
(b) Which package will the CEO prefer?
(c) Which packages yields the highest profits for the firm?
(d) * [BONUS QUESTION] Suppose the CEO could buy insurance for the package
that you offered her. How much would she be willing to pay for “CEO insurance”?
7