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Microeconomics II
Midterm
04/15, 2008
I.
Multiple Choices (45 points)
1) The above figure depicts the Edgeworth box for two individuals, Al and
Bruce. Points a and b
A) are most likely to reflect the final endowments after trading.
B) are least likely to reflect the final endowments after trading.
C) are equally likely to reflect the final endowments after trading than other
points on the contract curve.
D) are definitely not the final endowments after trading.
2) In a competitive marketplace, prices adjust until
A) MRS's are equal to zero.
B) excess supply equals excess demand equals zero in all markets.
C) each consumer has maximized utility subject to his budget constraint.
D) all firms earn zero profit.
3) If a society only cares about efficiency and not equity, then
A) all points on the contract curve yield the same level of social welfare.
B) it will not rely on competitive markets to allocate goods.
C) it will maximize the utility of its worst-off member.
D) an equitable outcome is impossible.
4) Suppose the production possibilities for two countries, producing either
food or clothing, are shown in the above figure. They can each produce any
linear combination as well. Measuring food on the horizontal axis, the joint
production possibility frontier
A) will have a slope of -3/4 over the entire frontier.
B) will have a slope of -2 when less than 20 units of food are produced.
C) will have a slope of -1 when less than 20 units of food are produced.
D) will have a slope of -1/2 when less than 20 units of food are produced.
5) If a firm is able to set price
A) is a monopoly.
B) its marginal revenue is constant.
C) it sells its output at a constant price.
D) it faces a downward-sloping demand curve.
6) If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is
constant at 16, then the deadweight loss from monopoly equals
A) $21.
B) $441.
C) $882.
D) $1,764.
7) The above figure shows the demand and cost curves facing a monopoly. At
the profit-maximizing price, the elasticity of demand equals
A) -1.
B) zero.
C) infinity.
D) -3.
8) For a monopoly, marginal revenue is less than price because
A) the demand for the firm's output is downward sloping.
B) the firm has no supply curve.
C) the firm can sell all of its output at any price.
D) the demand for the firm's output is perfectly elastic.
9) The fact that a monopoly has to take the shapes of marginal cost AND
marginal revenue into account when making decisions is reflected in the
fact that
A) monopolies don't have a supply curve.
B) monopolies don't have a demand curve.
C) monopolies have the same supply curve as perfectly competitive firms.
D) monopolies maximize profit.
10) When firms price discriminate they turn ___________ into ___________.
A) producer surplus, revenue
B) consumer surplus, profit
C) total cost, profit
D) producer surplus, consumer surplus
11) Quantity discrimination makes sense if
A) buyers of smaller quantities are more price sensitive than buyers of larger
quantities.
B) buyers of smaller quantities are less price sensitive than buyers of larger
quantities.
C) demand for the good is perfectly elastic.
D) the lower price for larger quantities encourages all consumers to purchase
the larger quantity.
12) Two-part tariffs offer a mechanism whereby the firm can
A) charge two different prices to distinct groups of customers.
B) collect two times as much from consumers as a single-price monopoly can.
C) capture some or all of the consumer surplus.
D) reduce some of its fixed costs.
13) The above figure shows a payoff matrix for two firms, A and B, that must
choose between selling basic computers or advanced computers. Which of
the following is a Nash equilibrium?
A) Both firms make advanced computers.
B) Both firms make basic computers.
C) Firm A makes basic computers and firm B makes advanced computers.
D) There are no Nash equilibria.
14) The term prisoners' dilemma refers to a game in which
A) there are no Nash equilibria.
B) there are no dominant strategies.
C) the payoff from playing the dominant strategy is the same for each player.
D) the payoff from playing the dominant strategy is not the highest payoff
possible.
15) In a sense, a cartel is self-destructive because
A) it reduces consumer surplus.
B) it sets price above marginal cost.
C) each cartel member has the incentive to cheat on the cartel.
D) each cartel member earns economic profit.
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II. True or False (30 points)
For the following, please answer "True" or "False" and explain why.
1) A competitive equilibrium is not Pareto efficient if some members of
society are unable to afford a necessary good.
2) A monopoly does not have a supply curve.
3) A firm that practices multimarket price discrimination will set the lower
price in the market that has the most elastic demand.
4) A perfect-price-discriminating monopoly maximizes social welfare as
measured by the sum of producer surplus plus consumer surplus.
5) Collusion is more successful in a game that will continue forever or in a
game with an uncertain ending time, than in a game with a known ending
time.
III. Problems (35 points)
1) (10 points)
A weapons producer sells guns to two countries that are at war with each
other. The guns can be produced at a constant marginal cost of $10. The
demand for guns from the two countries can be represented as:
QA = 100 - 2p
QB = 80 - 4p
Why is the weapons producer able to price discriminate?
What price will it charge to each country?
2) (10 points)
How does competition ensure that the efficient product mix is attained?
3) (15 points)
A monopoly sells music CDs. It has a constant marginal and average cost of
20. It faces two groups of potential customers：honest and dishonest people.
The dishonest and the honest consumers’ demand functions are the same：
p = 120-Q
a. If it is not possible for the dishonest customers to steal the music, what are
the monopoly’s profit-maximizing price and quantity? What is its profit?
What are the consumer surplus, producer surplus, and welfare?
b. Answer the same questions as in the previous part if the dishonest
customers can pirate the music.
c. How do consumer surplus, producer surplus, and welfare change if piracy
occurs?