Final Examination Thursday, June 16, 2016, 3:30pm 4:45pm ECON 201

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1 Intermediate microeconomics Korea Univ. Name: Student ID: Beomsoo Kim Spring 2016 Final Examination Thursday, June 16, 2016, 3:30pm 4:45pm ECON 201 There are 6 questions and 170 possible points. There are 3 pages to this exam. You will have 75 minutes to complete the exam. During the exam, you may use a calculator and a dictionary. Use of hand-held electronic devices (such as cell phones, blackberries, palm pilots, etc.) during the exam is strictly prohibited. 1. (20 points, 10 points each) Firm A Advanced Firm B Basic Advanced (20, 20) (50, 30) Basic (30, 50) (20, 20) The above figure shows the payoff for two firms, A and B, that must each choose to produce either an advanced computer or a basic computer. a. Determine the dominant strategies for each firm (if any). b. Determine the Nash equilibria (if any). 2. (20 points, 10 points each) Jeremy derives all of his utility from consuming milk shakes; he devotes his entire $20 allowance to milk shakes each week. Suppose the price of milk shakes rises from $2 to $4. a. Compute Jeremy's Compensating Variation b. Compute Jeremy's Equivalent Variation. 3. (40 points, 10 points each) Consider a weapons producer that is selling guns to two countries that are at war with one another. Guns can be produced at a constant marginal cost of $10 per gun. The demand for guns in each of the countries is given by: p = Q (Country A) p = Q (Country B) a. If the weapons producer can charge different prices to each country, what price and quantity will it sell to each? b. If the weapons producer cannot price discriminate, what price and quantity of guns will it sell to each country? 1

2 Intermediate microeconomics Korea Univ. c. Will the weapons manufacturer make more profit from price discriminating? Briefly explain. Why is it that the manufacturer will likely be able to price discriminate? d. Which country will benefit from price discrimination? Which country will be worse off from price discrimination? Explain briefly. 4. (30 points, 10 points each) Suppose all individuals are identical, and their monthly demand for Internet access from a certain leading provider can be represented as p = 5 - (1/2)q, where p is price in $ per hour and q is hours per month. The firm faces a constant marginal cost of $1. a. What quantity the firm will sell when the firm utilizes the profit maximizing two-part tariff? b. What will be the maximum membership fee? c. How much will be per use fee? 5. (40 points, 10 points each) Suppose that a man and a woman each choose whether to go to a concert or a movie. The man prefers the concert but the woman prefers the movie. What is more important to them, however, is that the man wants to show up at the same event as the woman, but the woman wants to avoid the man. a. Construct a game matrix to illustrate this game, choosing numbers to fit the preferences described verbally. b. If the woman moves first, what will happen? c. Does the game have a first-mover advantage? d. If both players move simultaneously, is there Nash equilibrium? 6. (20 points, 10 points each) Suppose the market demand for output is given by the linear inverse demand function, P=10-0.1Q and assume output can be produce by two firms, where both firms can produce output at constant marginal costs, but MC1=$2/unit and MC2=$3/unit. a. If output is determined by a Cournot quantity model, how much will each firm produce? What would be the resulting market outcome? b. Suppose instead market outcome is determined by Bertrand Competition. What would be the resulting market outcome? Honor Pledge: I pledge on my honor that I have not given or received any unauthorized assistance on this assignment/examination. Signature: 2

3 Name: Student ID: Beomsoo Kim Spring 2015 Final Examination Monday, June 15, 2013, 3:30pm 4:45pm ECON 201 There are 6 questions and 170 possible points. There are 3 pages to this exam. You will have 75 minutes to complete the exam. During the exam, you may use a calculator and a dictionary. Use of hand-held electronic devices (such as cell phones, blackberries, palm pilots, etc.) during the exam is strictly prohibited. 1. (15 points, 5 points each) Explain the nature and consequences of asymmetric information for each of the following cases. What options are available in each instance to reduce the problem? a) Medical insurance b) Issuance of credit cards c) Market for used appliances 2. (30 points, 6 points each) Suppose you are the CEO of a watchmaking firm operating in a competitive market. Your cost of production is given by C=300+4q 2, where q is the level of output and C is total cost. a) What is the marginal cost? b) What is fixed cost? c) If the price of watches is $96, how many watches should you produce to maximize profit? d) What will the profit level be? e) At what minimum price will the firm produce a positive output?

4 3. (15 points, 5 points each) Suppose that the market demand for mountain spring water is given as follows: P = Q Mountain spring water can be produced at no cost. a) What is the profit maximizing level of output and price of a monopolist? b) What level of output would be produced by each firm in a Cournot duopoly in the long run? What will the price be? c) What will be the level of output and price in the long run if this industry were perfectly competitive? 4. (33 points) Bob and Ray have just purchased VCR's and they wish to rent movies for home use. The local video shop requires that customers must first join a movie club before they can rent movies. The two possible clubs are: -The "Director's Club", which has an annual membership fee of $12, and entitles club members to rent movies for $4/night. -The "Producer's Club", which has an annual membership fee of $25, and entitles club members to rent movies for $2/night. The demand curves for nightly movie rentals in a given year are Q d =36-6P and Q d =9-P for Bob and Ray respectively. Which movie club will, if any, will Bob and Ray join? Explain your answer and show your work. 5. (47 points, 8 points each unless specified) Suppose a European firm --Airbus-- and a U.S. firm --Boeing-- are considering producing a new commercial jet aircraft. Suppose the payoffs from different combinations of actions are Airbus Produce Boeing Produce -5,-5 100,0 Don't Produce 0,100 0,0 Don't Produce a) If both firms move simultaneously, what are the Nash equilibrium(s) to this game? b) Suppose Boeing has already begun research and development on the new aircraft and it can therefore make its decision first. What decision will each firm make?

5 c) Does Boeing have a first-mover advantage? For the remaining questions, suppose European countries offer a $10 subsidy to Airbus if Airbus decides to produce, regardless of Boeing's decision. d) (15 points) Draw a new payoff matrix with updated information. e) If both firms move simultaneously, what decision will each firm make? 6. (30 points, 10 points each) It costs $10 to produce a low-quality wallet and $20 to produce a high-quality wallet. Consumers cannot distinguish between the products before purchase, do not make repeat purchases, and value the wallets at the cost of production. The five firms in the market produce 100 wallets each. Each firm produces only high-quality or only low-quality wallets. Consumers pay the expected value of a wallet. Show your work. a) If all five firms make low-quality wallets how much would consumers pay per wallet? b) If one firm makes high-quality wallet and all the others make low-quality wallet, what is the expected value per wallet to consumer? c) How many firms would produce high-quality wallet? Honor Pledge: I pledge on my honor that I have not given or received any unauthorized assistance on this assignment/examination. Signature:

6 Name: Student ID: Beomsoo Kim Spring 2014 Final Examination Monday, June 16, 2013, 3:30pm 4:45pm ECON 201 There are 6 questions and 170 possible points. There are 3 pages to this exam. You will have 75 minutes to complete the exam. During the exam, you may use a calculator and a dictionary. Use of hand-held electronic devices (such as cell phones, blackberries, palm pilots, etc.) during the exam is strictly prohibited. 1. (16 points, 4 points each) Write down the definition of the following terms a) Positive Externality b) Dominant strategy c) Adverse selection d) Nash Equilibrium 2. (26 points) Suppose long-run production of automobile per day is given by q A = K 0.5 L 0.5. a) (7 points) In the short run (holding K fixed) does this production function exhibit diminishing marginal returns, constant marginal returns, or increasing marginal returns? (Explain your answer with an example, like K =5) b) (7 points) In the long run (allowing both K and L to change) does this production function exhibit decreasing returns to scale, constant returns to scale, or increasing returns or scale? (Explain your answer with an example.) c) (12 points) Here is another production function. Q=AL α K ß Describe the situation when constant, increasing, or decreasing returns to scale. 3. (45 points, 7 points each unless specified) Suppose a stream is discovered whose water has remarkable healing powers. You decide to bottle the liquid and sell it. The market demand curve is linear and is given as follows: P = 30 Q The marginal cost to produce this new drink is $3. a) What price would this new drink sell for if it sold in a competitive market?

7 b) What is the monopoly price of this new drink? c) What will be the price of this new drink in the long run if the industry is a Cournot duopoly? d) (10 points) What will be the price of this new drink in the long run if the industry is a Stackelberg duopoly? Tell me separate price for the leader and the follower. e) What will be the price of this new drink in the long run if the industry is a Bertrand duopoly? f) What will be the price of this new drink in the long run if the firms in the industry collude with one another to maximize joint profit? 4. (32 points, 7 points each unless specified) Suppose that all firms in a constantcost industry have the following long-run cost curve: c(q) = 5q q The demand in this market is given by QD = p. To produce firms need to have a permit and there are only 50 permits a) Derive the supply curve in this situation. Find the market equilibrium price and quantity with the restriction. b) If firms are allowed to buy and sell these permits in an open market, what will be the rental price of permits? Will firm s that own permits make profit? c) (10 points) Due to deregulation policy of the new government the permit requirement in this market has been abolished. What will be the new price in this market? What will be the market equilibrium quantity? d) (8 points) How much deadweight loss is generated by the permit system? Show your work 5. (21 points, 7 points each) Merriwell Corporation has a virtual monopoly in the ultra high speed computer market. Merriwell has recently introduced a new computer that will be used by satellite installations around the world. The installations have identical demands for the computers. Merriwell s managers have decided to lease rather than sell the computer, but they have been unable to decide whether to use a single hourly rental charge or a two-part tariff. Under the two-part tariff, users would be levied an access charge plus an hourly rental rate. Merriwell s marketing staff estimates the demand and marginal revenue curves below for each potential user: P = Q MR = Q, where P = price per hour of computer time, and Q = the number of hours of

8 computer time leased per month. Merriwell offers their users extensive maintenance assistance and technical support. The firm s engineers estimate that marginal cost is $30 per computer hour. a) Assuming that Merriwell chooses to set a single price, what are the firm s profit maximizing price and output? b) Assuming that Merriwell uses a two-part tariff, what access charge and hourly rental fee should the firm set? c) Compare the firm s revenues under the options in (a) and (b). 6. (30 points, 10 points each) The market for used cars in a particular region includes both high quality and low quality cars. High quality cars are sold primarily to quality sensitive customers, while low quality cars are sold to price sensitive buyers. The submarkets for high quality and low quality cars can be described by the supply and demand curves: QD H = 160, P H QS H = - 48, P H QD L = 110, P L QS L = 20, P L, where QD H, QS H refer to the quantities demanded and supplied of high quality cars, QD L, QS L refer to the quantities demanded and supplied of low quality cars, P H and P L refer to the prices of high quality and low quality cars. All quantities are measured in cars per month, prices are measured in dollars. a) Assuming that buyers and sellers are both able to distinguish low quality and high quality cars, determine the equilibrium price and quantity in each submarket. b) Examine the case where sellers are able to accurately determine used car quality but buyers are not. You may assume that buyers assume that all cars are of average quality so that an average demand curve is appropriate. Determine the price and quantity in each submarket. c) Make a conjecture what will happen in the market until final long run equilibrium is reached. You must describe the eventual outcome, but no calculations are required for this part of the problem. Honor Pledge: I pledge on my honor that I have not given or received any unauthorized assistance on this assignment/examination. Signature:

9 Name: Student ID: Beomsoo Kim Spring 2013 Final Examination Monday, June 17, 2013, 3:30pm 4:45pm ECON 201 There are 6 questions and 170 possible points. There are 3 pages to this exam. You will have 75 minutes to complete the exam. During the exam, you may use a calculator and a dictionary. Use of hand-held electronic devices (such as cell phones, blackberries, palm pilots, etc.) during the exam is strictly prohibited. 1. (16 points, 4 points each) Write down the definition of the following terms a) Economies of scale b) Economies of scope c) Adverse selection d) Moral hazard 2. (10 points) Production function is F(L,K)=(L+K) 2. a) (4 points) Does this production function have constant, increasing, or decreasing returns to scale? b) (2 points each) Here is another production function. Q=AL α K ß Describe the situation when constant, increasing, or decreasing returns to scale. 3. (24 points, 6 points each) Suppose a consumer advocacy group has convinced legislators that vitamin pills should be cheap to consumers. Such a policy would enhance the health of the citizenry, they argue. As a result one bottle of vitamin pills are sold at the price of $3 in the market although the marginal cost is $7. Assuming a downward-sloping linear demand curve Q=100-P. a) Determine the resulting output and social welfare from such a policy. b) Compare this result to the competitive equilibrium. c) Calculate the deadweight loss. d) Explain your intuition why deadweight loss occurs with this policy. 4. (30 points, 6 points each) Korean air sells to both tourist and business travelers on Jeju route. Tourists always stay over on Saturday nights, while business travelers never do. The weekly demand function of tourists is Q t = P, and the weekly demand function of business travelers is Q b =1000-P. a) If the marginal cost of a ticket is $200, what prices should Korean air set for its tourist ticket and its business ticket? b) If government passes a law that says all tickets must cost the same amount, what price will Korean air set?

10 c) What would be the elasticities of demand for the two groups at that price calculated in part b? d) Suppose Korean air only has 1300 seats per week on Jeju. How many of those seats should it sell to tourists and business travelers, respectively? e) In part d) what will its prices be? 5. (36 points, 6 points each) A monopolist can produce at marginal cost of MC=$7. It faces a market demand curve given by P=45-Q a) Calculate the profit-maximizing price and quantity for this monopolist. Show your work in detail b) A second firm enters the market. Let Q 1 be the output of the first firm and Q 2 be the output of the second. Market demand is now given by Q 1 +Q 2 =45- P This second firm has the same costs as the first. Write the profits of each firm as functions of Q 1 and Q 2 c) Suppose (as in the Cournot Model) that each firm chooses its profitmaximizing level of output on the assumption that its competitor s output is fixed. Find each firm s reaction curve d) Calculate the Cournot equilibrium and find the market price and profits of each firm. e) Suppose Firm 1 is the Stackelberg leader (makes its output decisions before Firm 2). How much will each firm produce? f) Suppose two firms are competing in price. What is the equilibrium price? 6. (54 points, 6 points each)two used car dealerships compete side by side. The first, Harry s cars, always sells high quality cars. On average, it costs Harry s $8000 to buy and service each car that it sells. The second dealership, Lew s Motors, always sells lower-quality cars. On average, it costs Lew s only $5000 for each car that it sells. If consumers knew the quality of the used cars they were buying, they would pay $10,000 on average for Harry s cars and only $7000 on average for Lew s cars. Without more information, consumers don t know the quality of each dealership s cars and assume 50% chance of ending up with a high-quality or low-quality car. a) How much consumers are willing to pay to buy used car? Harry has an idea: He will offer a bumper-to-bumper warranty for all cars that he sells. A warranty lasting Y years will cost $500Y on average, and he also knows that if Lew tries to offer the same warranty, it will cost Lew $1000Y on average. Once only one dealership offer warranty consumer assumes that dealership with warranty sells high-quality car and dealership without warranty sells low-quality car. However, when both dealerships act the same (offer warranty or not offering warranty) then consumer does not know the quality of the car.

11 Suppose Harry offers a one-year warranty on all of the cars he sells. b) What is Lew s profit if he does not offer a one-year warranty? c) What is Lew s profit if he does offer a one-year warranty? d) What is Harry s profit if Lew does not offer a one-year warranty? e) What is Harry s profit if Lew does offer a one-year warranty? f) Will Lew s match Harry s one-year warranty? g) Fill out the payoff (Profit) matrix of the following for one-year warranty. Harry s Warranty No warranty Warranty Lew s No warranty h) Is it a good idea for Harry s to offer a one-year warranty? i) Fill out the payoff matrix When Harry offers a two-year warranty. Harry s Warranty No warranty Warranty Lew s No warranty Honor Pledge: I pledge on my honor that I have not given or received any unauthorized assistance on this assignment/examination. Signature:

12 Econ206 Spring 2012 Department of Economics, Korea University Final Exam Beomsoo Kim Total : 170 points Exam time: 3:30 4: Jersey Pharmaceuticals produces a highly profitable drug, but the patent on the drug is about to expire and General Generic has indicated that they wish to produce a generic equivalent for the drug once the patent expires. Jersey wishes to discourage General Generic's entry into this market. It can do so potentially by producing a large amount of the drug, thus making a generic equivalent unprofitable. Listed below is a payoff matrix for Jersey's and Generic's decisions: Jersey can produce either a low or high output, and General must decide whether to enter the market or not. Jersey High Output General Generic Enter Don't Enter 5,-2 12,0 Low Output 6,6 8,0 a. Define Nash equilibrium. Suppose both firms move simultaneously. What are the Nash equilibrium(s) for this game? Explain. b. Suppose however, that Jersey moves first. Will Jersey successfully deter entry? Explain your answer. Is there a first-mover advantage for Jersey? 2. Mary derives utility from the consumption of ham (H) and eggs (E). Assume both ham and eggs are normal goods, and assume that Mary considers these goods to be compliments. a. Graph Mary's budget constraint for ham and eggs. What is the slope of the budget constraint? Suppose the price of eggs increases. Illustrate and explain how the price change will alter Mary's budget constraint. b. What effects will the increase in the price of eggs have on the demand for E and H? On your graph, derive the income and substitution effects for E and H that are generated by the price change. Carefully explain what is measured by income and substitution effects. c. Assume that ham price become $1 so we can use this as a dollar measure base unit. Define compensating variation. Using your graph from part b), illustrate the size of the compensating variation. 3. All firms in a perfectly competitive industry have the same long-run cost curves where LRAC=50-Q+0.01Q 2 and LRMC=50-2Q+0.03Q 2. If the market demand is given by the linear function Q=10, P, what is the market-clearing value

13 Econ206 Spring 2012 Beomsoo Kim for price, the quantity demand, output per firm, and the number of firms in longrun equilibrium? 4. For each of the production functions listed below, determine whether the production technology exhibits constant, increasing, or decreasing returns to scale (a numeric example will be sufficient): a) Q = L 1/3 K 1/3 b) Q = L 1/2 + K 1/2 c)to produce each unit of output, a firm must use exactly 3 units of L and 5 units of K. 5. Suppose a firm is the sole producer of unique type of surf board wax. The wax can be produced at a constant marginal cost of $4/ounce. The firm faces two types of customers for their product -- west coast surfers and east coast surfers -- and the demand for both groups is given by the following inverse demand functions: P w =20-0.1q w, and P e = q e. Suppose this firm wishes to charge western and eastern customers different prices for the product. What is the profit maximizing price that should be charged in each market? At these prices, what are the elasticities of demand for both markets? 6. Weekly demand for pounds of coffee in the town of Twin Peaks is given by the inverse demand curve P=20-0.5*Q. Suppose there are only two firms that supply coffee to the town, and both firms can produce coffee at a constant $4/pound (MC=AC=$4). Suppose each firm is maximizing profits by following a Cournot quantity model of duopoly. What is reaction functions for firm A and B? What quantity will each firm produce, and what will be market price for the output? What are profits for each firm? 7. Suppose 100 cars will be offered on the used-car market, 50 of them good cars, each worth $10,000 to a buyer, and 50 of them lemons, each worth $2,000. a. Compute a buyer s maximum willingness to pay for a car if he or she cannot observe the car s type? b. Suppose that there are enough buyers that competition among them leads cars to be sold at their maximum willingness to pay. What would the market equilibrium be if sellers value good cars at $8,000? Specifically mention market price and quantity. c. What would the market equilibrium be if sellers value good cars at $6,000? Specifically mention market price and quantity. Honor Pledge: I pledge on my honor that I have not given or received any unauthorized assistance on this assignment/examination. Signature: