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Economics 324
Final Exam Study Questions
1.
Please answer question 9 on Page 255 of your text.
2.
In class, we demonstrated the outcome of the Cournot Reaction Model under
duopoly (2 competitors) using a market demand of Q=100–P and MC=0
a. How would the answer change if MC=50?
b. Extend the Cournot Reaction Model to three producers (rather than 2) who
each (and in sequence) make an output decision assuming that the other
two producers will not change their output. Use a market demand of
Q=100-P and assume that each producer has MC=0. What will be the
equilibrium quantity and price for each producer?
3.
Statement a: “The market demand for heroin is said to be highly inelastic.”
Statement b: “Heroin supply is also said to be monopolized by the Mafia,
which we assume to be interested in maximizing profits.”
Are these two statements consistent with each other? Explain.
4.
“Imposing an excise tax on a monopoly will cause the price to increase by the
amount of the tax.” Do you agree or disagree? (Remember, an excise tax is a
fixed tax per item sold.)
5.
Some have argued that taxing a price searcher with a lump-sum tax (tax that is
the same regardless of level of current production) and then using the tax
proceeds to subsidize that producer’s output on a per-unit basis would reduce
the efficiency loss due to monopoly (see fig. 8.5 on page 233). Others say that
this is ridiculous because the tax and subsidy would offset each other and,
therefore, have no effect on the producer’s output decision. Which position
do you believe is correct? Explain.
6.
Why would drug stores give senior citizens—those who have one of the
greatest demands for pharmaceuticals due to failing health—a discount on
prescription drugs?
7.
The majority of successful Justice Department actions against companies for
colluding have involved collusion when bidding on government
contracts…even when government contracts constitute a relatively small
portion of the colluding companies’ business. Why would it be easier for
companies to collude when selling to the government versus when they sell to
buyers in the private sector? (Hint: Would government public disclosure laws
have anything to do with it? Why?)