Econ 100a Final 1997

Perloff

(NOTE: This exam was not cumulative, whereas the 1999 exam will be)

A. 8-Point Questions: Answer exactly 5 questions in this section.

A1 List as many conditions as you can that lead to a cartel being successful (in raising price and not falling apart).

A2 Using a graph, show how a price floor can be used to get a perfectly competitive market to produce the socially optimal amount of output when there is a negative externality of production (pollution).

A3 What happens to firm profits and the number of firms in a monopolistically competitive market if a lump-sum tax (collected annually) is placed on the firms in the short-run and in the long-run? [Student suggested]

A4 Cigarette manufacturers may not advertise on television. How does imposing this restriction affect the equilibrium price and quantity in that market? Explain.

A5 The more output a firm produces the greater the externality damage from pollution. Determine if the following statement is true or false, and explain your answer with a graph: A tax equal to the marginal externality damage placed on the polluting firm always will lead to a welfare improvement.

A6 Davies Symphony Hall has a fixed capacity. The Symphony may set a price per concert, sell only season tickets, use two-part tariffs, or use other pricing schemes. Discuss how the Symphony may price its tickets to capture all the consumer surplus if it cannot perfectly price discriminate? Explain your answer. [Student suggested]

B. 14-Point Questions: Answer both these questions.

B1 A monopoly can imperfectly discriminate between two groups of customers. Its marginal cost of production is 2. Group A's (constant) elasticity of demand is -4 and Group B's is -2. What prices does the monopoly charge the two groups?

B2 A homeowner has an opportunity to switch to fluorescent light bulbs for a one-time price of $300. The fluorescent light bulbs would save her $20 per year in electricity bills from now on (you may assume she makes these savings forever and there is no inflation). Her discount rate is 5%.

A. Would she choose to switch to fluorescent light bulbs? (5 pts)

B. At what discount rate would she be indifferent about switching? (4 pts)

C. Suppose she could instead use the $300 to make a different one-year investment that would return a gross of $400 next year. What would she choose to do? (5 pts)

C. 14-Point Question: Answer exactly 1 question in this section.

C1 Two firms are in the chocolate market. Each can choose to go for the high end of the market (high quality) or the low end (low quality). The resulting profits are given by the following payoff matrix:

A. Nash: The firms move simultaneously. What outcomes, if any, are Nash equilibria? (3 pts) Explain why these outcomes are Nash. (3 pts)

B. Stackelberg: Draw the game tree if Firm 1 goes first. (3 pts) Show Firm 2's best response on the game tree. (1 pt) What is the outcome if Firm 1 can pick its quality level first? Explain. (4 pts)

C2 An incumbent firm can get the legislature to raise its marginal cost and that of a potential entrant by $50. There is no cost to lobbying. If the incumbent lobbies and gets the higher marginal cost and the other firm later enters, both firms lose $10. If the other firm does not enter it makes $0 and the incumbent makes $50. If the incumbent does not get the legislature to raise costs and the other firm enters, both firms make $40. If the other firm does not enter, it makes $0 and the incumbent makes $100.

A. Illustrate this game using a game tree. (5 pts)

B. What actions do the incumbent and entrant take and why? (9 pts)

D. 18-Point Questions: Answer the question in this section.

D1 Market demand is p = 26 - Q. Two identical firms have cost functions C = 64 + 2q, where q is each firm's individual output. (So MC = 2.) The firms produce identical products.

A. What is the Cournot-Nash equilibrium market price and output? (8 pts)

B. Would a third identical firm want to enter? (5 pts)

C. What is the equilibrium (market price and quantity of each firm) if the firms collude and split the market equally? (5 pts)