Download Test #1, ECMC02, Oct 10 2003

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ECMC02
Term Test - October 10, 2003
Professor Gordon Cleveland
Time: 100 minutes
PART I - 25 Multiple Choice Questions - 75 marks
1. The widget industry in Canada is composed of 100 firms with identical costs, and their
short run total cost functions are:
TC = 0.5q2 + 10q + 5
Total monthly demand for widgets is given by:
Q = 1100 - 50P
This information can be used to answer questions 1-3 and question 5.
What is the equilibrium quantity of widgets traded in the market each month?
A) 0
B) 10
C) 20
D) 30
E) 40
F) 50
G) 80
H) 90
I) 100
J) 120
K) 140
L) 160
M) 180
N) 200
O) 240
P) 280
Q) 300
R)320
S) 360
T) 400
U) 480
V) 500
W) 600
X) 800
Y) more information is needed to answer
Z) none of the above
2. How much profit will the typical widget-making firm make each month?
A) a big loss B) $0
C) $1
D) $2
E) $3
F) $4
G) $5
H) $8
I) $10
J) $12
K) $15
L) $20
M) $25
N) $30
O) $40
P) $50
Q) $60
R) $70
S) $80
T) $90
U) $100
V) $120
W) $140
X) $160
Y) $400
Z) none of the above
3. What is the total of the consumer and producer surplus in this industry each month?
A) a negative value B) $0
C) $1
D) $2
E) $3
F) $4
G) $6
H) $8
I) $16
J) $24
K) $32
L) $64
M) $96
N) $120
O) $400
P) $600
Q) $800
R) $1200
S) $1600
T) $2000
U) $2400
V) $2800
W) $3200
X) $4800
Y) $6400
Z) none of the above
4. Which of the following statements are true about short-run producer surplus?
I. Short-run producer surplus is equal to total industry profits minus fixed costs.
II. Short-run producer surplus is equal to total industry profits plus fixed costs.
III. Short-run producer surplus is also known as the Arent@ earned by producers (or
Ricardian rent).
IV. Short-run producer surplus is the amount by which total producer revenues
exceed total variable costs.
A) I
B) II
C) III
D) IV
E) I and II F) I and III
G) I and IV H) II and III I) II and IV J) III and IV K) I and II and III
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L) I and III and IV M) I and II and III and IV
N) none of the above
Use the information in Question #1 to answer this question.
5. If the government imposes a tax of $3 per widget on this industry, what is the loss of
producer surplus as a result of the tax?:
A) $0
G) $150
M) $450
S) $750
Y) $2000
B) $10C) $20 D) $40
H) $200
I) $250
N) $500
O) $550
T) $800
U) $850
Z) none of the above
E) $50
J) $300
P) $600
V) $900
F) $100
K) $350
Q) $650
W) $950
L) $400
R) $700
X) $1000
6. There are 1000 small producers of coal, with identical costs given by:
TC = 100 + 5q + 0.5q2
The demand for coal is given by: Q = -2000P + 70,000.
What is the amount of consumer surplus in a perfectly competitive equilibrium?
You should use this information in answering questions 6 through 9.
A) $0
B) $12,000 C) $24,000 D) $28,000 E) $30,000 F) $34,000
G) $36,000 H) $38,000 I) $40,000 J) $42,000 K) $44,000 L) $46,000
M) $48,000 N) $50,000 O) $60,000 P) $64,000 Q) $70,000 R) $76,000
S) $80,000 T) $90,000 U) $100,000 V) $110,000 W) $120,000 X) $150,000
Y) $200,000 Z) none of the above
7. The 1000 small coal producers described in Question 6 still exist, but now a very large
coal producer with lower costs of production enters the market (this new firm has found a
large and cheap, inexhaustible supply of coal). This new firm acts like a dominant firm
providing price leadership, while the remaining 1000 firms act like a competitive fringe.
The new firm can produce as much coal as it wants at a price of $15 per unit (i.e., AC =
MC = $15). How much output will this dominant firm produce as the price leader in this
industry?
A) 0
B) 1200
C) 2400
D) 2800
E) 3000
F) 3400
G) 3600
H) 3800
I) 4000
J) 5000
K) 7500
L) 8000
M) 10,000 N) 12,000
O) 12,500 P) 14,000
Q) 15,000 R) 16,000
S) 17,500
T) 20,000
U) 25,000 V) 30,000
W) 40,000 X) 50,000
Y) 60,000
8. What will the equilibrium price of coal be in this industry?
A) $0
B) $1
C) $2.50
D) $4
E) $5
G) $7.50
H) $8
I) $10
J) $11
K) $12
M) $15
N) $16
O) $17.50 P) $18
Q) $20
S) none of the above
F) $6
L) $14
R) $25
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9. How much is consumer surplus in the coal industry under the price leadership of this
new firm?
A) $0
B) $12,000 C) $24,000 D) $28,000 E) $30,000 F) $34,000
G) $36,000 H) $38,000 I) $40,000 J) $42,000 K) $44,000 L) $50,000
M) $60,000 N) $70,000 O) $75,000 P) $80,000 Q) $90,000 R) $100,000
S) $112,500 T) $125,000 U) $175,000 V) $200,000 W) $225,000 X) $450,000
Y) $500,000 Z) none of the above
10-12. A producer of silver bracelets sells bracelets in two distinct markets in different
geographic locations. You are given the following the demand curves for these distinct
markets:
Market #1:
Market #2:
Q1 = 60 - P1
Q2 = 70 - P2
where P refers to prices charged in each market and Q refers to quantities demanded in
each market. The cost of producing bracelets is uniform at $10 each bracelet. In addition
there are fixed costs of $300 per period. Questions 10 through 12 concern this case.
10. If the producer of silver bracelets can price discriminate by charging different prices in
each market, the profit maximizing price charged in Market #1 will be:
A) $0
G) $17.00
M) $40.00
S) $150
Y) $220
B) $5
C) $10D) $12.50
E) $15.00
F) $16.00
H) $18.00
I) $20
J) $25.00
K) $30.00 L) $35.00
N) $50
O) $60
P) $75
Q) $100
R) $140
T) $160
U) $170
V) $180
W) $190
X) $200
Z) none of the above
11. If the producer of silver bracelets can price discriminate by charging different prices in
each market, the profit maximizing price charged in Market #2 will be:
A) $0
G) $17.00
M) $40.00
S) $150
Y) $220
B) $5
C) $10D) $12.50
E) $15.00
F) $16.00
H) $18.00
I) $20
J) $25.00
K) $30.00 L) $35.00
N) $50
O) $60
P) $75
Q) $100
R) $140
T) $160
U) $170
V) $180
W) $190
X) $200
Z) none of the above
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12. Assume now that the producer of silver bracelets is unable to discriminate between
markets but must sell at a uniform price. By how much will profits change as a result of
this?
A) -$287.50
G) +$5
M) +$40
S) +$60
Y) +$567
B) -$125.00 C) -$100
H) +$10
I) +$12.50
N) +$45
O) +$47
T) +$100
U) +$125
Z) none of the above
D) -$15
J) +$15
P) +$48
V) +$287.50
E) -$12.50
K) +$30
Q) +$50
W) +$300
F) $0
L) +$36
R) +$54
X) +$500
13-18. An industry consists of two firms, each of which have variable costs of $12 per unit
but no fixed costs. The industry demand curve is P = 156 - 4Q. Questions 13 through 18
concern this industry.
13. If the firms collude and agree to split the total profits in the industry, then the price that
will result is:
A) $0
B) $12C) $24D) $28
E) $32
F) $34
G) $36
H) $38
I) $40
J) $42
K) $44
L) $46
M) $48
N) $50
O) $52
P) $54
Q) $56
R) $60
S) $64
T) $68
U) $76
V) $80
W) $84
X) $90
Y) more information is needed to answer
Z) none of the above
14. If the firms compete under the Cournot assumptions (that is, each firm assumes that the
other firm will not change its output), then the price that will result in the Nash equilibrium
is:
A) $0
B) $12C) $24D) $28
E) $32
F) $34
G) $36
H) $38
I) $40
J) $42
K) $44
L) $46
M) $48
N) $50
O) $52
P) $54
Q) $56
R) $60
S) $64
T) $68
U) $76
V) $80
W) $84
X) $90
Y) more information is needed to answer
Z) none of the above
15. Now suppose that one firm is a Stackelberg leader while other firm is a follower.
Assume, as usual, that the follower behaves like a Cournot duopolist (that is, assumes that
the leader's output is fixed). Then the price that will result is:
A) $0
B) $12C) $24D) $28
E) $32
F) $34
G) $36
H) $38
I) $40
J) $42
K) $44
L) $46
M) $48
N) $50
O) $52
P) $54
Q) $56
R) $60
S) $64
T) $68
U) $76
V) $80
W) $92
X) $96
Y) more information is needed to answer
Z) none of the above
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16. Now suppose that the firms compete under the Bertrand assumptions. Then the price
that will result in the Nash equilibrium is:
A) $0
B) $12C) $24 D) $28
E) $32
F) $34
G) $36
H) $38
I) $40
J) $42
K) $44
L) $46
M) $48
N) $50
O) $52
P) $54
Q) $56
R) $60
S) $64
T) $68
U) $76
V) $80
W) $92
X) $96
Y) more information is needed to answer
Z) none of the above
17. If we move from the Cournot equilibrium obtained in question 14 to the Stackelberg
leader-follower equilibrium obtained in question 15, then the deadweight loss rises (+) or
falls (-) by:
A) $0
B) +$8
C) -$8
D) +$18
E) -$18
F) +$32
G) -$32
H) +$64
I) -$64
J) +$96
K) -$96
L) +$112
M) -$112
N) +$126
O) -$126
P) +$162
Q) -$162
R) +$216
S) -$216
T) +$288
U) -$288
V) +$360
W) -$360
X) +$400
Y) more information is needed to answer
Z) none of the above
18. Now change the problem slightly. The first firm continues to have variable costs of
$12 per unit and no fixed costs, but now the second firm has variable costs of $60 per unit
and no fixed costs. [Note - this problem has not been done in class, but can be solved using
the techniques you have learned.] If the firms compete under the Cournot assumptions
(that is, each firm assumes that the other firm will not change its output), then the price that
will result in the Nash equilibrium is:
A) $0
B) $12C) $24 D) $28
E) $32
F) $34
G) $36
H) $38
I) $40
J) $42
K) $44
L) $46
M) $48
N) $50
O) $52
P) $54
Q) $56
R) $60
S) $64
T) $68
U) $76
V) $80
W) $92
X) $96
Y) more information is needed to answer
Z) none of the above
19. If a monopolist is in profit-maximizing equilibrium and its marginal cost is constant at
$9.00, while the profit-maximizing price charged is $12, then we can say that the elasticity
of demand is:
A) 0
B) -0.1
C) -0.2
D) -0.25
E) -0.3
F) -0.33
G) -0.4
H) -0.5
I) -0.6
J) -0.67
K) -0.7
L) -0.75
M) -0.8
N) -0.9
O) -1
P) -2
Q) -3
R) -4
S) -5
T) -6
U) -7
V) -8
W) none of the above
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20. Which of the following statements are true about a Nash equilibrium?
I. The Cournot model results in a Nash equilibrium.
II. The perfectly competitive model results in a Nash equilibrium.
III. The Bertrand model results in a Nash equilibrium.
IV. A Nash equilibrium is the most efficient outcome.
A) I
B) II
C) III
D) IV
E) I and II F) I and III
G) I and IV H) II and III I) II and IV J) III and IV K) I and II and III
L) I and III and IV M) I and II and III and IV
N) none of the above
21. Which of the following statements are true about the Chamberlinian model of
monopolistic competition?
I. In the short run, profits can be made by each firm (each brand) in the industry.
II. In the long run, the free entry or exit of new firms drives the price down to the
minimum average cost.
III. New entrants compete equally with all existing firms (brands) in the industry,
and, assuming costs and technology are the same as other firms, these new entrants
will have an equal market share.
IV. Entry of new firms will shift the entire market demand curve for the product to
the left.
A) I
B) II
C) III
D) IV
E) I and II F) I and III
G) I and IV H) II and III I) II and IV J) III and IV K) I and II and III
L) I and III and IV M) I and II and III and IV
N) none of the above
22-23. Assume that there is a beach one mile long and sun worshippers are spread evenly
along the beach along its entire length. Each of the people on the beach eats their lunch at a
restaurant on the beach. They must walk to the restaurant and the cost of transportation is
equal for everyone. There is already a long-established restaurant at the end of the beach,
exactly at the one-mile mark. It would be much too expensive for this restaurant to move,
so we can assume that its location is fixed. A new entrant (a new restaurant) is considering
locating on the beach (with prices and meals the same as the existing restaurant). Where
should this restaurant locate to give the most efficient possible location, minimizing
transportation costs?
A) at 0; the opposite end of the beach
B) at 1/4 mile C) at 1/3 mile
D) at 2 mile
E) at 2/3 mile
F) at 3/4 mile
G) at 1 mile; just to the left of the existing restaurant H) none of the above
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23. Consider again the beach described in question #22. Ignore the issue of efficiency and
assume that there is again only one restaurant, at the end of the beach. If the new entrant is
seeking to maximize its revenue, where will the new entrant locate?
A) at 0; the opposite end of the beach
B) at 1/4 mile C) at 1/3 mile
D) at 2 mile
E) at 2/3 mile
F) at 3/4 mile
G) at 1 mile; just to the left of the existing restaurant H) none of the above
24. Which of the following statements are true about the Hotelling (i.e., spatial or location)
model of monopolistic competition (i.e., the circle model)?
I. The demand for the output of each firm depends on the prices charged by
neighbouring firms.
II. The demand for the output of each firm depends on the distance between firms.
III. In equilibrium, the price charged by each firm (brand) is equal to marginal cost.
IV. The price charged by the representative firm is not affected by the cost of
production.
A) I
B) II
C) III
D) IV
E) I and II F) I and III
G) I and IV H) II and III I) II and IV J) III and IV K) I and II and III
L) I and III and IV M) I and II and III and IV
N) none of the above
25. Which of the following is an example of price discrimination?
I. Discount stores often sell products for less than department stores
II. Banks and movie theatres offer discounts to the elderly
III. Insurance companies offer a discount for those who avoid traffic tickets
IV. Airlines offer a discount to those who travel on weekends
A) I
B) II
C) III
D) IV
E) I and II F) I and III
G) I and IV H) II and III I) II and IV J) III and IV K) I and II and III
L) I and III and IV M) I and II and III and IV
N) none of the above
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PART II - Graphical and Short Answer Questions - 25 marks
26. The graph below shows demand and supply for shoes in a small country in which there
is no international trade in shoes. Equilibrium price and quantity are shown. Imagine now
that this domestic market is opened to international trade in shoes and that shoes are
available in perfectly elastic supply at $20 per pair from international sources. (a) Indicate
the new supply curve (S=) and show the new equilibrium quantity (Q1*) and the new
equilibrium price (P1*).
(b) Now suppose that a 50% tariff is placed on shoes. Show the new supply curve (S@) and
the new (after-tariff) equilibrium quantity (Q2*) and the new equilibrium price (P2*).
(c) Indicate by shading the amount of deadweight loss due to the tariff.
(d) According to this diagram, approximately how much tariff revenue will be raised by
government (write this amount below your graph)?
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27. A constant cost competitive industry in the long run consists of small firms, each of
which produces 5 units of output at a minimum long run average cost of $50. The demand
curve facing the industry is given by P = 300 - .01Q At some point in time, a law is
passed allowing a single firm to take over all production in this industry. The small
competitive firms disappear, and the single firm may produce as much output as it wishes at
the same long run average cost of $50. On the diagram below, show: i) the long run
competitive output, ii) the output produced by the monopolist, iii) the competitive price, iv)
the monopoly price, v) the monopoly profits, vi) the consumer surplus lost when the
industry is monopolized, and vii) the deadweight loss associated with the monopoly. In
each case, show the answer on the diagram, and indicate the numeric value.