Prof. Dr. Hanno Beck Microeconomics WS 2013/14

Transcription

1 WS 2013/14 Questions (1) In the 1980s, the European Union (EU) promised farmers to buy the whole production for a minimum price farmers were promised that they could sell their entire production to the EU. Show by means of the concept of producer surplus and consumer surplus the consequences of this policy. (2) The public german pension system is in a crisis the burden of this system may become unsustainable. (a) Why do we need a public pension system? (b) Explain the german pay-as-you-go pension system how does it work? (c) What are the problems of a pay-as-you-go system? (d) Which options do you know for a reform of this system? Explain your ideas and show how they would work. (3) You are owner of an icecream-parlor and wonder if you should raise your prices. If you increase the price from 7 to 9 Euro, demand decreases from 9 to 7 units. a. Explain the concept of elasticity of demandwhat is the elasticity of demand for your product? Is it elastic or inelastic? c. What determines the elasticity of demand? d. Explain in short words the income elasticty of demand. (15 Minutes) (4) The Kyoto treaty tries to tackle the problem of pollution by means of tradable emission permits. a. Why do we need environmental policy? Explain the concept of externalities. b. Explain how tradable emission permits work. c. What are the problems of tradable emission permits? (20 Minutes) (5) If you want to buy a CD of your favorite group or singer, you have the choice between the standard CD (with only the music) and the Deluxe edition containing booklets, foldout covers, interesting liner notes or interviews, often packed into plastic sleeves, metal or cigar boxes but the music is still the same as on the standard CD.

2 a) Show by means of consumer- and producer surplus the consequences of this price policy for consumers and producers. Why are some people buying the Deluxe edition, and what happens to their consumer surplus? b) The group U2 takes this strategy to the next level by offering the Super Deluxe Edition, the Deluxe Edition and the standard CD. What are the consequences of this strategy? (6) Explain the difference between positive and normative theories. (7) Explain the difference between economic profit and accounting profit. Given perfect competition, why is economic profit in the long run always zero? (8) The anglo-saxon magazine The Economist found another source of externalities: children. Anybody who has suffered a 12-hour flight with a bawling baby in the row immediately ahead or a bored youngster viciously kicking their seat from behind, will grasp this as quickly as they would love to grasp the youngster s neck, writes the magazine. Is this true? Do children on business flights impose a negative externality on other passengers? Explain your answer. (9) German politicians are talking about a minimum wage for the german labor market. The Initiative for a New Social Market Economy (INSM) has great concerns about the minimum wage plans; it is the firm belief of the INSM that minimum wages breach a decisive market-based principle and do not fit to the concept of a Social market economy. a) Explain the concept of the Social Market Economy. b) What is the option the concept of the Social market economy offers instead of minimum wages? (15 minutes) (10) Golden Balls was a British daytime game show on the ITV network. In the final jackpot division, each contestant chooses one of two golden balls, one with "Split" printed inside it, and one with "Steal" printed inside it. If both contestants choose the Split ball, the jackpot ( ) is split equally between them. If one contestant chooses a Split ball and the other chooses a Steal ball, the Stealer gets all the money and the Splitter gets nothing. If both - 2 -

3 contestants choose Steal balls, they both get nothing. The players have a chance to speak with each other face to face before making their choices. a) What is the result of the game? Write down the payoff matrix. b) What is the result of the game if it is being played three times? c) What is the result of the game if it is being played indefinitely often? Explain your answers. (11) As the public becomes more and more outraged about the behavior of banks in the financial crisis 2007, politicians and the occupy-wall-street-movement are suggesting a tax on financial activities to punish banks for their behavior. a) Show by means of consumer- and producer surplus the consequences of such a tax. Does it increase overall welfare? b) Show by means of consumer- and producer surplus who will shoulder the economic burden of the tax (and who not). c) Explain under which circumstances this tax will really punish banks for their behaviour. Do you think this outcome is realistic? If not, why? (12) Explain the idea of a natural monopoly. What is the reason for the origin of such a monopoly? What can politicians do about this problem? (13) Companies like Danone, Schwartau and Alnatura are competing on the market for smoothies, i.e. blended and sometimes sweetened beverage made from fresh fruit. From an economic point of view, this market can be described as monopolistic competition. a) Show by means of a graph how monopolistic competition works. What is the result of this competition? b) Compare the results from monopolistic competition with the results from perfect competition what happens to overall welfare? (14) Two days after the Durban summit, Canada left the Kyoto protocol, an international agreement aimed to stop Climate Change. Why is climate change an economic problem, why are markets failing to provide a proper amount of environmental protection? Explain your answer by means of the idea of externalities

4 (15) What is a public good? Explain what a public good is and give two examples. (16) Public services union ver.di has welcomed the government's decision to implement a minimum wage of Euro 8.02 an hour in the waste sector. Federal employment minister Ursula von der Leyen signed the regulation in December so that it would come into effect in January. Ver.di estimates that around 20,000 workers are likely to be better off with some having been employed on wages as low as Euro 4 an hour. What are the consequences of such a minimum wage? Explain your reasoning by means of consumer- and producer surplus. Which role plays the elasticity of demand for labor? (17) What are your total costs of making an MBA in Pforzheim? Explain your answer by means of the idea of opportunity costs. (18) Your evil teacher, Mr. B. is the only supplier of microeconomics-lectures at your university and he charges you for his lecture. Explain by means of a graph how Mr. B. maximizes his profit by choosing the adequate price for his lecture and the quantity of hours he offers to the market. What are the consequences of this monopoly for overall welfare? (19) As you explain the law of demand to your friend, he denies this idea by giving an example: Last summer, so his argument goes, prices for ice cream increased, but nonetheless demand for ice cream increased too. What do you answer your friend? What was his mistake? (20) Give two examples of abusive behaviour and anti-competitive practices. Is this behaviour always a problem for competition policy? And if not, why? (21) Explain the different types of market failure. (22) Explain the idea of the german Social market economy. (23) Explain how companies in perfect competition maximise their profits. Show this behaviour and the profit of a company in perfect competition by means of a graph. What - 4 -

5 is the crucial assumption of this reasoning and what is the difference compared to a monopoly? (24) What possibilities do you have to pay a cab-driver? And how would you like to pay him assuring that he will not cheat you? (10 Minutes) (25) During last summer, food prices were rising steadily. Politicians calimed that this would make it hard for people with low income to buy food, therefore one should introduce price controls, which would prevent food prices from climbing even higher. Do you think this is a good idea? Show graphically what happens to the food market if one introduces a price ceiling und what happens to total welfare (assuming that the economy is closed, i.e. there are no exports and imports). (26) Explain and show graphically what happens to the marginal-cost-curve, the average cost-curve, the supply curve, output and price if you a) introduce a tax on inputs b) introduce a tax on fixed costs. (27) You are the owner of the only ice cream parlor in town, but now a new competitor plans to enter the market. If he enters, you could lower prices, thereby lowering your profits from 200 to 70. Instead of lowering prices, you could still charge a higher price allowing your competitor to enter the market this would make your profits drop from 200 to 100. If your competitor enters the market, there are two possible scenarios: you lower your prices this will make him lose 10. If you don t start this price war and charge high prices, his profits will be 20. If you lower your prices and he stays out of the market, your profits drop to 130. Will your competitor enter the market? If yes (or no), why? (15 minutes) (28) The ARD (Consortium of Public-law Broadcasting Institutions of the Federal Republic of Germany), and its sister, the ZDF, want to spend more money on their internet business. In the beginning of broadcasting, the introduction of the so-called public broadcasting ( Öffentlich-rechtlicher Rundfunk ) was being justified by the public-good-character of broadcasting. a. Explain the idea of a public good. What is a public good and why is it a reason for market failure? Is broadcasting a public good? And is broadcasting on the internet a public good? Explain your reasoning.some politicians refer to - 5 -

6 broadcasting as quasi-private good (merit want). Explain this idea? What are the problems with this idea? (15 Minutes) - 6 -