SAMPLE FINAL FOR WISSINK S 1110 CLASS - From Spring 1996

Transcription

1 SAMPLE FINAL FOR WISSINK S 1110 CLASS - From Spring 1996 INSTRUCTIONS 1) There are three sections in this exam. 2) ANSWER ALL QUESTIONS. TOTAL POINTS = 200 3) There are 18 multiple choice questions: each is worth 3 points, use about 2.5 minutes for each. 4) There are 4 short essay problems: each is worth 14 points, use about 10 minutes for each. 5) There are 3 problems: each is worth 30 points, use about 22 minutes for each. 6) Read all questions carefully. 7) Write legibly and remember to label all graphs. 8) Total time = 2.5 hours = 150 minutes. GOOD LUCK

2 Part I. Multiple Choice. Answer all 18. Each correct answer is worth 3 points. Take about 2.5 minutes for each. Read each question carefully and CIRCLE the best answer. It often helps to jot down a quick graph next to the question before searching for the answer. 1. You purchased a ticket to a concert for $30 a month ago. Last week someone invited you to a party on the same night as the concert. You would much rather go to the party than the concert. You have tried unsuccessfully to sell the concert ticket. Which of the following statements regarding this situation is correct? a) The $30 you paid for the concert ticket is relevant to the decision, since this represents the opportunity cost of attending the party. b) You should base your decision on whether or not the party will provide you with more than $30 in satisfaction. c) The $30 concert ticket should be irrelevant in your decision making, since it is a sunk cost. d) The $30 concert ticket should be irrelevant in your decision making, since it represents the marginal cost of attending the party. 2. Which of the following is a positive question? a) Will the level of teenage unemployment increase if the minimum wage is increased? b) Should the minimum wage be set at one-half the average manufacturing wage to guarantee individuals a decent standard of living? c) Wouldn*t it be more equitable if the minimum wage increased automatically with the cost of living? d) Wouldn*t it be better to try to increase people*s wages through job-training programs than by requiring employers to pay minimum wages? 3. In an imperfectly competitive industry a) a single firm has no control over the price of its output. b) a single firm has some control over the price of its output. c) a single firm will charge the price that maximizes revenue. d) the government will always regulate the output price. 4. The price of computer chips used in the manufacture of personal computers has fallen. This will lead to personal computers. a) an increase in the supply of b) a decrease in the supply of c) an increase in the quantity supplied of d) a decrease in the quantity supplied of 5. Which of the following will unambiguously occur when there is a simultaneous decrease in demand and a decrease in supply? a) an increase in equilibrium price. 2

3 b) a decrease in equilibrium price. c) an increase in equilibrium quantity. d) a decrease in equilibrium quantity. 6. For a normal good, the income and substitution effect of a price decrease a) work in the opposite direction at low prices, but the same direction at high prices. b) work in opposite directions to increase or decrease the quantity demanded of the good. c) work in the same direction to increase the quantity demanded of the good. d) work in the same direction at low prices, but opposite directions at high prices. 7. If the owner of an ice cream store charges a $1.20 for an ice cream cone his total revenue is $540 a day. If he lowers the price to $1.00 his total revenue is $500 a day. The demand for ice cream is a) elastic. b) inelastic. c) unitarily elastic. d) neither elastic nor inelastic because this situation violates the law of demand. 8. Demand curves are derived while holding constant a) income and tastes. b) income, tastes, and the price of the good. c) tastes and the price of other goods. d) income, tastes, and the price of other goods. 9. In monopolistic competition at the profit-maximizing price, a) price equals marginal revenue. b) price is less than marginal revenue. c) price is greater than marginal revenue. d) price may be either greater than or less than marginal revenue. 10. If the opportunity costs of producing a good increase as more of that good is produced, the economy s production possibility frontier will be a) negatively sloped and bowed inward toward the origin. b) negatively sloped and bowed outward from the origin. c) a negatively sloped straight line. d) a positively sloped straight line. 11. Pizza World Restaurant had to increase the price of its pizzas due to higher input costs, but found that the number of pizzas sold actually increased slightly. The likely explanation is: 3

4 a) a violation of the law of supply. b) a violation of the law of demand. c) an outward shift in the demand for dinners. d) an elastic demand. 12. If the cross-price elasticity is negative, then a) X and Y are complements. b) X and Y are substitutes. c) X and Y are unrelated. d) consumer income has increased. 13. Which of the following is an INCORRECT statement about a household's budget constraint? a) Points on a budget constraint represent combinations of the goods that exactly use up the household's income. b) Points within the budget constraint represent combinations of the goods that do not use up all the household's income. c) If points A and B lie on the budget constraint, we can deduce that a household is indifferent between the two. d) If the price of one good decreased, ceteris paribus, the budget constraint will swivel or rotate outward. 14. Public goods are a) rival in consumption and their benefits are excludable. b) nonrival in consumption and their benefits are excludable. c) nonrival in consumption and their benefits are nonexcludable. d) rival in consumption and their benefits are nonexcludable. 15. Which of the following has more of the characteristics of a public good? a) education. b) trash collection. c) a public library. d) fire protection. 16. In which of the following circumstances would a cartel be most likely to work? a) The coffee market, where the product is standardized and there are a large number of coffee growers. 4

5 b) The market for copper, where there are very few producers and the product is standardized. c) The automobile industry, where there are few producers but there is great product differentiation. d) The fast-food market, where there is a large number of producers but the demand for fast food is inelastic. 17. As new firms enter a monopolistically competitive industry, the demand curve facing each existing firm a) will shift to the left and become more elastic because there are now more substitutes for its product. b) will shift to the left and become less elastic because there are now more substitutes for its product. c) will not be affected because the new firms do not produce a perfect substitute for its product. d) will shift to the left, but the elasticity of demand will not be affected. 18. Both Kate and Kyle own furniture factories that produce rocking chairs. In her factory Kate uses a production process that has very low fixed costs and very high variable costs. In his factory Kyle uses a production process that has very high fixed costs and very low variable costs. Currently, each factory is producing 100 rocking chairs at the same total cost. Which of the following statements is correct? If each produces a) less, their costs will be equal. b) more, their costs will be equal. c) more, the costs of Kate's factory will exceed those of Kyle's factory. d) less, the costs of Kate's factory will exceed those of Kyle's factory. Part II. "Mark-true, make-true" or Short Essay. Either answer the stated question or critically evaluate the statement and explain why or in what way the statement is true, false, or uncertain. No credit will be given for answers without explanations. Use graphs whenever possible along with your explanations, or better yet, for your explanations. 1. The following is from an article that appeared in the Wall Street Journal on September 14, "Yet another survey shows that the hospitality industry, buoyed by higher room rates, gains in productivity and better management, is headed toward record profits in In 5

6 its annual report on the industry, PKF Consulting in San Francisco predicts U.S. hotels will have an average operating profit margin of 25% next year, up from an expected 24.5% this year. Occupancy is also scooting up, causing some corporations to scramble for meeting space, says Human Resource Executive (a trade magazine). Coopers and Lybrand's Bjorn Hanson points out that a strong leisure market coupled with a busy fall-meetings season together add pressure for rooms. Both PKF and Coopers expect the occupancy growth pace to slow down the road as hotels add rooms, cementing their recovery from the recession in the early 1990's." Analyze the article using the material covered in class (most notably supply and demand). I expect your analysis to include supply and demand graphs as well as a short explanation explaining what is happening in the graphs. 2. Testing for the presence of positive economic profit is a sure-fire way to test for whether or not there are entry barriers in an industry. That is to say, if firms in an industry have positive profits, then one can conclude that there are entry barriers in that industry. And on the other hand, if there are entry barriers in an industry once can concluded that firms in that industry will earn positive profits. 3. What three conditions are necessary (that is to say, must be present) for an entrepreneur to be able to successfully practice price discrimination? Describe/graph the equilibrium for a monopolist who successfully practices 1st degree (also known as perfect) price discrimination. What is good and what is bad about this equilibrium? 4. Gasoline prices have risen so significantly in recent weeks that their level has become an issue in the presidential campaign. Republican candidate Bob Dole has proposed that the federal gasoline tax be reduced by 4.3 cents per gallon. Using supply and demand diagrams, explain carefully the likely effects of such a change. In particular, what will happen to the quantity of gasoline purchased? Will the price of gasoline fall by 4.3 cents, or by a greater or lesser amount? Not to be outdone, President Clinton has ordered the sale of a significant amount of gasoline from the government*s Strategic Petroleum Reserve. Using supply and demand diagrams, explain carefully the likely effects of this policy. Part III. Problems. Read each problem carefully and answer all questions. Show as much work as possible given time limitations. Partial credit will be given when appropriate, so if you have trouble with numerical solutions draw the pictures anyway, they are certainly worth something, especially if they are drawn correctly. 1. Wonder Season and Today s Christmas (WS and TC, respectively) are the only providers of Christmas trees in the Ithaca area. As such, they view each other as duopolists. They are simultaneously and non-cooperatively deciding whether or not to enter the Ithaca Christmas tree market next December. Assume that WS s and TC s situation can be completely represented by the following game in normal form. 6

7 TODAY s CHRISTMAS enter not enter WONDER SEASON enter B WS = -1, B TC = -1 B WS = 50, B TC = 0 not enter B WS = 0, B TC = 50 B WS =0, B TC = 0 a. Write down each firm s best response function. b. Do there exist any dominant strategy equilibria to this game? If so, what are they? What are the dominant strategy equilibrium outcomes? (That is, what are the payoffs to the two firms in each of the dominant strategy equilibria you found?) c. Do there exist any Nash equilibria to this game? If so, what are they? What are the Nash equilibrium outcomes? (That is, what are the payoffs to the two firms in each of the Nash equilibria you found?) d. Do there exist any maxi-min equilibria to this game? If so, what are they? What are the maximin equilibrium outcomes? (That is, what are the payoffs to the two firms in each of the maxi-min equilibria you found?) e. Suppose now that the owner of TC has some influence in the local government and he manages to get the town of Ithaca to provide TC a subsidy of $6 if and only if both firms enter the market. Fill in the following game matrix to incorporate this information. TODAY s CHRISTMAS enter not enter 7

8 TODAY s CHRISTMAS WONDER SEASON enter B WS =, B TC = B WS =, B TC = not enter B WS =, B TC = B WS =,B TC = f. Redo parts (a) through (d) with this new game matrix. Comment on the effects of the subsidy. In particular, what is the effect of the subsidy on the outcome of the game compared to the original situation. 2. Phil Fizz starts a company selling spring water which comes from a mountain spring near Cayuga Lake. Phil calls his water Cayuga Crystal. Because Phil owns this "special" spring, he holds a monopoly over the sale of Cayuga Crystal Spring Water. Phil also convinces his customers that the environmentally correct thing to do is to bring their own bottles -- thus, Phil's marginal cost is always zero, regardless of how many gallons he sells. Assume his fixed costs are zero, too. a. Suppose Phil faces the demand curve described in the following table. Fill in the missing blanks and plot the demand curve and the marginal revenue curve and marginal cost curve in the space provided below. price gallons demanded total revenue marginal revenue marginal cost 16 0 xxxxxxxxx xxxxxxxxxxx

9 b. Show Phil's profit maximizing decision on the diagram you drew for part (a). What are Phil's profit maximizing price and quantity? What is his profit? What are the values of consumers' surplus and producer s surplus at Phil's profit maximizing price and quantity? What is the value of net social surplus at this equilibrium? SUGGESTION: IF YOU CAN'T SOLVE FOR THESE VALUES NUMERICALLY THEN SHOW ME WHERE THEY ARE ON YOUR GRAPH. c. The Mayor of Ithaca learns about Phil's monopoly profits and decides to slap a price ceiling on Cayuga Crystal. What should the price ceiling be set at to insure that there is allocative efficiency at Cayuga Crystal? In the diagram for part (a), illustrate this new situation and how Phil will react to the price ceiling. Specifically, what is Phil's new profit maximizing price and quantity? What is his profit? What is the new net social surplus? 3. Assume that the taxi industry in Ithaca satisfies the following set of assumptions: A1) The industry is perfectly competitive. A2) The industry is presently in long-run equilibrium. A3) The industry is a constant-cost industry, that is to say, the cost of inputs and/or the technology do not change when taxis enter and/or exit the industry. A4) Each taxi driver has a set of "typically" shaped cost curves. In particular this means that short-run supply curve for the individual taxi driver and the industry is typically shaped (due possibly to "dilly-dallying" on the part of taxi drivers). A5) All taxi drivers are the same. A6) Demand for taxi rides is typically shaped. a. Graph the present long-run equilibrium situation for both a typical taxi driver and the entire taxi industry. Suppose now that the mayor decides to license taxi drivers and issues a limited number of licenses, less than the number of taxis currently in operation. The licenses are freely given to existing taxi drivers on a random basis. For example they put names into a hat and draw out the lucky drivers to decide who will, and who will not, be given a license. Assume that you must have a license to operate a taxi and the government does not collect a fee for the license. HINT: THE TOTAL NUMBER OF TAXI-FIRMS WILL NOW BE LESS. b. Explain and indicate on the graphs for the previous part what will happen to price, quantity, and profit in the short-run and long-run once the licenses have been issued. Be sure to discuss and graphically point out both the effect on the individual taxi driver and the entire taxi market. c. If any taxi driver with a license can sell the license to an ex-taxi driver who did not get a license, what will be the maximum amount the ex-taxi driver will be willing to pay for the license? (I m not looking for an exact number.) d. What would happen to Ithaca's taxi market if someone purchased all the taxi licenses at once? Would it make sense for someone purchasing all the licenses at once to be willing to pay more than the total number of licenses times your answer to part (c) of this question? Explain. 9