# Economics 323 Microeconomic Theory Fall 2016

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1 green=b SECOND EXAM Chapter Ten Economics 323 Microeconomic Theory Fall The markets for many come close to satisfying the conditions required for perfect competition. a. agricultural goods b. transportation products c. chemicals d. skill-intensive manufactures 2. In the short run, a firm that shuts down will earn economic profit of a. -FC b. zero c. ATC d. FC 3. A perfectly competitive firm will earn zero economic profit if produces a quantity where P = MC = a. AFC b. AVC c. ATC d. TC 4. For prices above, a perfectly competitive firm will supply the level of output for which P = MC on the rising portion of its MC curve. a. min AFC b. min AVC c. min ATC d. min VC -1-

2 5. Suppose n firms each have supply curve P = c + dq i. The industry supply curve will be a. P = c/n + (d/n)q b. P = c + (d/n)q c. P = cn + dq d. P = c + dnq 6. A firm in a competitive industry has a total cost function of TC = 0.5Q² + 10Q + 100, whose corresponding marginal cost curve is MC = Q If the firm faces a price of 20, what quantity should it sell? a. 5 b. 10 c. 20 d And what profit does the firm make at this price? a. 100 b. -10 c. -50 d And should the firm shut down? a. yes, shut down right away b. not in the short run but yes shut down in the long run c. yes shut down in the short run but not in the long run d. no, should never shut down 9. And if the firm instead faces a price of 30, what quantity should it sell? a. 5 b. 10 c. 20 d

3 10. And what profit does the firm make at the new higher price? a. 100 b. -10 c. -50 d Chapter Eleven 11. If a single-price monopolist faces demand curve P = a - bq, the marginal revenue curve will be a. MR = a - (b/2)q b. MR = 2a - bq c. MR = a - bq d. MR = a - 2bQ 12. The total revenue curve for a single price monopolist (drawn as a function of quantity) a. is a straight line with slope -P b. is a straight line with slope P c. increases at a decreasing rate d. increases until reaches a maximum at the quantity where the price elasticity of demand is unitary, then decreases 13. The quantity such that MR = 0 for a single price monopolist occurs where the price elesticity of demand is a. elastic b. unitary c. inelastic d. cannot tell based on the information provided -3-

4 14. A profit-maximizing single price monopolist will NEVER produce in the portion of the demand curve. a. elastic b. unitary c. inelastic d. cannot tell based on the information provided 15. All monopolists create deadweight loss by producing too little and charging too high of a price EXCEPT for a. first degree (perfectly) discriminating monopolist b. second degree (quantity discount) discriminating monopolist c. single price monopolist d. all of the above e. none the above 16. A monopolist has a demand curve given by P = Q and a total cost curve given by TC = 20Q. The associated marginal cost curve is MC = 20. What is the monopolist's marginal revenue curve? a. MR = Q b. MR = Q c. MR = Q d. MR = Q 17. And what is the monopolist's profit maximizing quantity? a. Q = 1 b. Q = 2 c. Q = 3 d. Q = And what price will the monopolist charge? a. P = 50 b. P = 60 c. P = 70 d. P = 80-4-

5 19. And how much economic profit will the monopolist earn? a. 120 b. 160 c. 200 d And what quantity would the monopolist pick if instead of charging a single price, it could perfectly discriminate? a. Q = 1 b. Q = 2 c. Q = 3 d. Q = 4 Chapter Twelve 21. A dominated strategy is one that yields no matter what the other player chooses. a. a higher payoff b. a lower payoff c. the largest possible minimum payoff d. the smallest possible maximum payoff 22. When the timing of players choices matter, typically set up the series of decisions as a game. a. intensive form b. extensive form or sequential c. normal form d. abnormal form -5-

6 23. A strategy can elicit cooperation in a repeated Prisoner s Dilemma game a. maximin b. dominant c. tat-for-tit d. tit-for-tat 24. In a Nash equilibrium, each player s choice is optimal a. no matter what the other player chooses b. given the other player s choice c. under the assumption of bounded rationality d. if the payer gets to pick first 25. The basic elements of a game in which people s choices affect one another are a. the players b. the set of possible strategies c. the payoff matrix d. all of the above Tariff Game Free Trade Mexico Free Trade 200 for the 800 for Mexico Tariff -400 for the 1000 for Mexico The United States Tariff 400 for the for Mexico -200 for the -800 for Mexico -6-

8 green=b SECOND EXAM SOLUTIONS Chapter Ten Economics 323 Microeconomic Theory Fall a The markets for many agricultural goods come close to satisfying the conditions required for perfect competition. 2a In the short run, a firm that shuts down will earn economic profit of - FC. 3c A perfectly competitive firm will earn zero economic profit if produces a quantity where P = MC = ATC. 4b For prices above min AVC, a perfectly competitive firm will supply the level of output for which P = MC on the rising portion of its MC curve. 5b Suppose n firms each have supply curve P = c + dq i. The industry supply curve will be P = c + (d/n)q. 6b A firm in a competitive industry has a total cost function of TC = 0.5Q² + 10Q + 100, whose corresponding marginal cost curve is MC = Q If the firm faces a price of 20, what quantity should it sell? 10. P = MC, 20 = Q + 10, Q = 10. 7c And what profit does the firm make at this price? -50. TR - TC = PQ - (0.5Q² + 10Q + 100) = 20(10) - ( ) = = b And should the firm shut down? Not in the short run but yes shut down in the long run. If shut down now, profits would be -100 (negative of fixed costs). Losing 50 is better than losing c And if the firm instead faces a price of 30, what quantity should it sell? 20. P = MC, 30 = Q + 10, Q = a And what profit does the firm make at the new higher price? 100. TR - TC = PQ - (0.5Q² + 10Q + 100) = 30(20) - ( ) = = 100. Chapter Eleven 11de If a single-price monopolist faces demand curve P = a - bq, the marginal revenue curve will be MR = a - 2bQ. 12d The total revenue curve for a single price monopolist (drawn as a function of quantity) increases until reaches a maximum at the quantity where the price elasticity of demand is unitary, then decreases. -1-

9 13b 14c 15a The quantity such that MR = 0 for a single price monopolist occurs where the price elesticity of demand is unitary. A profit-maximizing single price monopolist will NEVER produce in the inelastic portion of the demand curve. All monopolists create deadweight loss by producing too little and charging too high of a price EXCEPT for first degree (perfectly) discriminating monopolist. 16b A monopolist has a demand curve given by P = Q and a total cost curve given by TC = 20Q. The associated marginal cost curve is MC = 20. What is the monopolist's marginal revenue curve? MR = Q. 17d And what is the monopolist's profit maximizing quantity? Q = 4. MR = MC, Q = 20, 20Q = 80, Q = 4. 18b And what price will the monopolist charge? P = b And how much economic profit will the monopolist earn? 160. TR - TC = PQ - 20Q = 60(4) - 20(4) = 40(4) = e And what quantity would the monopolist pick if instead of charging a single price, it could perfectly discriminate? Q = 8 (none of the above). P = MC, Q = 20, 10Q = 80, Q = 8. Chapter Twelve 21b A dominated strategy is one that yields a lower payoff no matter what the other player chooses. 22b When the timing of players choices matter, typically set up the series of decisions as a extensive form or sequential game. 23d A tit-for-tat strategy can elicit cooperation in a repeated Prisoner s Dilemma game 24b In a Nash equilibrium, each player s choice is optimal given the other player s choice. 25d The basic elements of a game in which people s choices affect one another are the players, the set of possible strategies, and the payoff matrix (all of the above). -2-

10 26a 27a 28a Tariff Game Free Trade Mexico Free Trade 200 for the 800 for Mexico Tariff -400 for the 1000 for Mexico The United States Tariff 400 for the for Mexico -200 for the -800 for Mexico In the Tariff Game above, does the United States have a dominant strategy? Yes, Tariff. And does Mexico have a dominant strategy? Yes, Tariff. And is there a Nash equilibrium fo this game? Yes, both countries pick Tariffs. 29a And the maximin strategies for each country are each country picks Tariff. 30a If The United States picks first, then Mexico, the equilibrium will be each country picks Tariff. -3-

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