Bsbwor501 Practice Exam
Practice Exam
Multiple choice questions.
1) Which of the following statements about natural monopoly is correct?
A) A natural monopoly’s average cost is decreasing.
B) A natural monopoly’s marginal cost is decreasing.
C) A natural monopoly usually has a small fix cost.
D) Governments usually want to ban natural monopoly.
2) Which of the following statements about perfect price discrimination is correct?
A) A firm in a perfect competitive market can apply perfect price discrimination.
B) A firm charges a single price when it applies perfect price discrimination.
C) Consumers’ consumption is inefficient when a firm applies perfect price discrimination.
D) In order to apply perfect price discrimination, a firm should know each individual consumer’s maximum willingness to pay.
3) Which of …show more content…
the following statements is incorrect?
A) A firm’s profit maximizing output is determined by MR(Q)=MC(Q) both in a perfect competitive market and a monopoly market.
B) Consumers favor perfect price discrimination because the consumption is efficient.
C) When monopoly practices perfect price discrimination, marginal consumer’s valuation equals to the marginal cost of the last unit.
D) A monopoly’s marginal revenue curve lies below its demand curve because it has to cut the price to sell more units of the good.
4) A monopoly sells to two different groups of consumers. The monopoly charges group 1 price $20 while the elasticity of demand for group 1 is -2. Suppose the elasticity of demand for group 2 is -5. What is the monopoly’s optimal price for group 2?
A) $12
B) $ 22
C) $12.5
D) Impossible to tell.
5) Suppose two people are trading their endowments. Which of the following statements is correct?
A) The equilibrium after trade results in one person being worse off than with his or her endowment.
B) The equilibrium after trade results in unequal marginal rates of substitution for the two people.
C) The equilibrium after trade is on contract curve.
D) The equilibrium after trade is Pareto inefficient.
6) What are necessary conditions for price discrimination?
A) Consumers must differ in their sensitivity to price and a firm must be able to identify it
B) A firm is able to limit resale among consumers.
C) A firm must have market power.
D) All of the above.
7) A monopoly sells 1000 units of its product at optimal price P=$250. The monopoly’s marginal cost is $50. How much is the monopoly’s elasticity of demand at the optimal output?
A) We do not have enough information to solve for the elasticity of demand.
B) -1.25
C) -0.8
D) -1
8) This question is a continuation on question 7). Suppose the demand curve is linear. What is the market demand facing the monopoly?
A) We need more information to pin down market demand.
B) Qd=2250-5p
C) Qd=1800-3.2p
D) Qd=-4p
9) Which of the following statements is correct?
A) Market with asymmetric information may collapse because both sellers and buyers are equally ignorant.
B) Market with asymmetric information is efficient as long as there are enough high quality products.
C) Market with asymmetric information is always inefficient regardless of the fraction of high quality products.
D) Market with asymmetric information is efficient as long as there are enough low quality products.
10) Consider a used car market characterized by the above diagram. Buyers are willing to pay $500 for a lemon and $1500 for a good car. A seller’s reservation price is $800 for a lemon and $1000 for a good used car. If both a seller and a buyer can tell the quality of a car, which type of cars will be sold?
A) Both types of cars will be sold.
B) Only good cars will be sold.
C) Only lemons will be sold.
D) Neither type of cars will be sold.
11) This question is a continuation on question 10). Suppose sellers and buyers are equally ignorant about used cars’ qualities. Which of the following statements is correct?
A) All cars are traded in the market place when both parties believe 3/8 of used cars are lemons.
B) Only lemons are traded in the market place.
C) Good used cars will not be traded if both parties believe 1/8 of used cars are lemons.
D) Lemons will not be traded if both parties believe 1/2 of used cars are lemons.
12) This question is a continuation on question 11). Suppose a buyer does not know a car’s quality and he knows the quality is the seller’s private information. Which of the following statements is correct?
A) Only lemons will be traded if buyers believe less than 50% of cars are lemons.
B) Good used cars will be traded if buyers believe 60% of cars are lemons.
C) Lemons will be traded if buyers believe 60% of cars are lemons.
D) Good used cars will be traded if buyers believe less than 50% of cars are lemons.
13) The above figure depicts a consumer’s demand for beers. A seller’s marginal cost is constant at $5. The seller considers two alternative selling strategies. He can charge a single price at $10 per beer. Or, he can charge the consumer $22 for the first beer and gives him the second beer for free. Which of the following statement is correct?
A) The buy one get one free strategy is more profitable.
B) The consumer will reject the buy one get one free offer.
C) The single price at $10 will yield more profit for the seller.
D) The seller’s profit from the buy one get one free strategy is $15.
14) Which of the following is an example of adverse selection?
A) A driver with auto insurance drives more aggressively than a driver without insurance.
B) A seller of a used car asks for a higher price if the quality of the car is better.
C) A driver is more likely to buy insurance if he is more risk averse.
D) An incompetent doctor is more likely to buy medical malpractice insurance.
15) Which of the following total cost functions suggests the presence of a natural monopoly?
A) TCQ=4/Q
B) TCQ=5Q2
C) TCQ=400Q+Q2
D) TCQ=Q2-20Q
16) Which of the following statements about Lerner Index is correct? A) A firm has more market power if its Learner Index is smaller. B) A firm’s Learner Index is smaller if the market demand is less elastic C) A monopoly market has a smaller deadweight loss when the monopoly has a larger Learner Index. D) A firm’s Lerner Index becomes smaller if a product has a new close subsidy.
17) Consider a monopoly market. The firm’s marginal cost function is mc(Q)=2Q. The market demand function is Qp=30-p/2. What is the monopoly’s optimal price and quantity?
A) p=$50,Q=5
B) p=$20,Q=10
C) p=$30,Q=15
D) p=$40,Q=10
18) This question is a continuation on question 17). How much is the social loss due to monopoly’s market power?
A) $50
B) $60
C) $40
D) $30
19) This question is a continuation on question 17). Suppose the government wishes to reduce the social loss through tax. Which of the following statements is correct?
A) A specific tax of $10 will eliminate the deadweight loss.
B) A specific tax of $20 will eliminate the deadweight loss.
C) A specific tax of $30 will eliminate the deadweight loss.
D) Taxing the monopoly will increase the deadweight loss.
20) This question is a continuation on question 17). Suppose the government considers using subsidy to reduce deadweight loss. Which of the following statements is correct?
A) Giving subsidy will increase the social loss.
B) A subsidy of $30 per unit will eliminate the social loss.
C) A subsidy of $10 per unit will eliminate the social loss.
D) A subsidy of $40 per unit will eliminate the social loss.
21) Suppose firms in the competitive market for cell phone are identical and can enter or exit the market freely. Each firm’s long-run average cost function is, and marginal cost function is . How much will each firm produce in the long run?
A) 6 units.
B) 8 units.
C) 3 units.
D) 10 units
22) This question is a continuation on 21).
Suppose the market demand for cell phone is . How many firms will there be in the long run equilibrium?
A) 50
B) 82
C) 164
D) 212
23) Competitive equilibrium maximize total welfare because
A) Firms make positive economic profits in the short run.
B) Firms make zero economic profit in the long run
C) Marginal value placed on the last unit by consumers equals to the marginal cost of producing that unit.
D) Firms may produce at a loss in the short run.
24) Consider the following information for a simultaneous move game: If you advertise and your rival advertises, you each will earn $5 million in profits. If neither of you advertise, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $15 million and the no advertising firm will earn $1 million. If you and your rival plan to be in business for only one year, the Nash equilibrium is
A. For each firm to advertise.
B. For neither firm to advertise.
C. For your firm to advertise and the other not to advertise.
D. None of the statements associated with this question are
correct.
25) Consider the following entry game. Here, firm B is an existing firm in the market, and firm A is a potential entrant. Firm A must decide whether to enter the market (play "enter") or stay out of the market (play "not enter"). If firm A decides to enter the market, firm B must decide whether to engage in a price war (play "hard"), or not (play "soft"). By playing "hard", firm B ensures that firm A makes a loss of $1 million, but firm B only makes $1 million in profits. On the other hand, if firm B plays "soft", the new entrant takes half of the market, and each firm earns profits of $5 million. If firm A stays out, it earns zero while firm B earns $10 million. Which of the following are Nash equilibrium strategies?
A. (enter, hard) and (not enter, hard).
B. (enter, soft) and (not enter, soft).
C. (not enter, hard) and (enter, soft).
D. (enter, hard) and (not enter, soft).
26) Firms A must decide whether or not to introduce a new product. If Firm A introduces a new product, Firm B must decide whether or not to clone the product. The payoff structure of the game is depicted in the above tree diagram. The sub-game perfect Nash equilibrium to this game is
A. Firm A plays "Introduce"; Firm B plays "Clone" if Firm A plays "Introduce".
B. Firm A plays "Do Not Introduce"; Firm B plays "Clone" if Firm A plays "Introduce".
C. Firm A plays "Introduce"; Firm B plays "Do Not Clone" if Firm A plays "Introduce".
D. Firm A plays "Do Not Introduce"; Firm B plays "Do Not Clone" if Firm A plays "Introduce".
The following question are based on this game, where firms one and two must independently decide whether to charge high or low prices.
27) Which of the following are Nash equilibrium payoffs in the one-shot game?
A. (0, 0).
B. (5, -5).
C. (-5, 5).
D. (10, 10). 28) Which of the following are the Nash equilibrium payoffs (each period) if the game is repeated 10 times?
A. (0, 0).
B. (5, -5).
C. (-5, 5).
D. (10, 10). 29) Suppose the game is infinitely repeated. Then the "best" the firms could do in a Nash equilibrium is to earn ___ per period.
A. (0, 0)
B. (5, -5)
C. (-5, 5)
D. (10, 10)
Short answer question
Suppose there are two consumers in the market with the following demand curves.
There is a single firm in the market whose marginal cost function is mc(Q)=Q. Suppose the firm does not have fix cost.
a) Suppose the firm can identify each consumer’s demand function. It offers two-part tariff (F1,P1) to consumer 1 and (F2,P2) to consumer 2. As is discussed in class, F stands for the lump sum fee and P stands for the price per unit. What is the optimal two-part tariff for each consumer? (10 points)
Consumer 1’s demand is Q=10-P. The competitive equilibrium is p=5, Q=5. The firm should set unit price P1=5 because it implements the efficient consumption. Consumer surplus is 12.5. Therefore, the fee F1=12.5.
Consumer 2’s demand is Q=6-P. The competitive equilibrium is p=3, Q=3. By the same argument above, P2=3, F2=4.5.
b) Suppose the firm knows that consumers have different demand functions but it cannot tell who is consumer 1 and who is consumer 2. (15 points)
I) How much profit does the firm make by offering (F1,P1) to both consumers? (5 points)
(F1,P1) allows the firm to extract the entire surplus from consumer 1. So, profit from consumer 1 is 25. Consumer 2 will not accept (F1,P1) because the fee is too high. So the firm’s total profit is 25.
II) How much profit does the firm make by offering (F2,P2) to both consumers? (5 points)
F2,P2 allows the firm to extract the entire surplus from consumer 2. So, profit from consumer 2 is 9. Given P2=3, consumer 1 will buy 7 units and consumer surplus is 24.5. So, consumer 1 will accept the offer. The firm will receive fee F2= $4.5. In addition, the revenue from the 7 units is 3*7=21, and the cost is 7*7/2=24.5. As a result, the firm’s profit from consumer 1 is 4.5+21-24.5=1. Its total profit is 9+1=10.
III) Can the firm implement the efficient consumption for both consumers and extract the entire consumer surplus? (5 points)
No. Since consumers have different demand curves, the firm has to give up some surplus to consumer 1 or cannot sell to consumer 2.
Multiple choice questions.
1) Which of the following statements about natural monopoly is correct?
A) A natural monopoly’s average cost is decreasing.
B) A natural monopoly’s marginal cost is decreasing.
C) A natural monopoly usually has a small fix cost.
D) Governments usually want to ban natural monopoly.
2) Which of the following statements about perfect price discrimination is correct?
A) A firm in a perfect competitive market can apply perfect price discrimination.
B) A firm charges a single price when it applies perfect price discrimination.
C) Consumers’ consumption is inefficient when a firm applies perfect price discrimination.
D) In order to apply perfect price discrimination, a firm should know each individual consumer’s maximum willingness to pay.
3) Which of …show more content…
the following statements is incorrect?
A) A firm’s profit maximizing output is determined by MR(Q)=MC(Q) both in a perfect competitive market and a monopoly market.
B) Consumers favor perfect price discrimination because the consumption is efficient.
C) When monopoly practices perfect price discrimination, marginal consumer’s valuation equals to the marginal cost of the last unit.
D) A monopoly’s marginal revenue curve lies below its demand curve because it has to cut the price to sell more units of the good.
4) A monopoly sells to two different groups of consumers. The monopoly charges group 1 price $20 while the elasticity of demand for group 1 is -2. Suppose the elasticity of demand for group 2 is -5. What is the monopoly’s optimal price for group 2?
A) $12
B) $ 22
C) $12.5
D) Impossible to tell.
5) Suppose two people are trading their endowments. Which of the following statements is correct?
A) The equilibrium after trade results in one person being worse off than with his or her endowment.
B) The equilibrium after trade results in unequal marginal rates of substitution for the two people.
C) The equilibrium after trade is on contract curve.
D) The equilibrium after trade is Pareto inefficient.
6) What are necessary conditions for price discrimination?
A) Consumers must differ in their sensitivity to price and a firm must be able to identify it
B) A firm is able to limit resale among consumers.
C) A firm must have market power.
D) All of the above.
7) A monopoly sells 1000 units of its product at optimal price P=$250. The monopoly’s marginal cost is $50. How much is the monopoly’s elasticity of demand at the optimal output?
A) We do not have enough information to solve for the elasticity of demand.
B) -1.25
C) -0.8
D) -1
8) This question is a continuation on question 7). Suppose the demand curve is linear. What is the market demand facing the monopoly?
A) We need more information to pin down market demand.
B) Qd=2250-5p
C) Qd=1800-3.2p
D) Qd=-4p
9) Which of the following statements is correct?
A) Market with asymmetric information may collapse because both sellers and buyers are equally ignorant.
B) Market with asymmetric information is efficient as long as there are enough high quality products.
C) Market with asymmetric information is always inefficient regardless of the fraction of high quality products.
D) Market with asymmetric information is efficient as long as there are enough low quality products.
10) Consider a used car market characterized by the above diagram. Buyers are willing to pay $500 for a lemon and $1500 for a good car. A seller’s reservation price is $800 for a lemon and $1000 for a good used car. If both a seller and a buyer can tell the quality of a car, which type of cars will be sold?
A) Both types of cars will be sold.
B) Only good cars will be sold.
C) Only lemons will be sold.
D) Neither type of cars will be sold.
11) This question is a continuation on question 10). Suppose sellers and buyers are equally ignorant about used cars’ qualities. Which of the following statements is correct?
A) All cars are traded in the market place when both parties believe 3/8 of used cars are lemons.
B) Only lemons are traded in the market place.
C) Good used cars will not be traded if both parties believe 1/8 of used cars are lemons.
D) Lemons will not be traded if both parties believe 1/2 of used cars are lemons.
12) This question is a continuation on question 11). Suppose a buyer does not know a car’s quality and he knows the quality is the seller’s private information. Which of the following statements is correct?
A) Only lemons will be traded if buyers believe less than 50% of cars are lemons.
B) Good used cars will be traded if buyers believe 60% of cars are lemons.
C) Lemons will be traded if buyers believe 60% of cars are lemons.
D) Good used cars will be traded if buyers believe less than 50% of cars are lemons.
13) The above figure depicts a consumer’s demand for beers. A seller’s marginal cost is constant at $5. The seller considers two alternative selling strategies. He can charge a single price at $10 per beer. Or, he can charge the consumer $22 for the first beer and gives him the second beer for free. Which of the following statement is correct?
A) The buy one get one free strategy is more profitable.
B) The consumer will reject the buy one get one free offer.
C) The single price at $10 will yield more profit for the seller.
D) The seller’s profit from the buy one get one free strategy is $15.
14) Which of the following is an example of adverse selection?
A) A driver with auto insurance drives more aggressively than a driver without insurance.
B) A seller of a used car asks for a higher price if the quality of the car is better.
C) A driver is more likely to buy insurance if he is more risk averse.
D) An incompetent doctor is more likely to buy medical malpractice insurance.
15) Which of the following total cost functions suggests the presence of a natural monopoly?
A) TCQ=4/Q
B) TCQ=5Q2
C) TCQ=400Q+Q2
D) TCQ=Q2-20Q
16) Which of the following statements about Lerner Index is correct? A) A firm has more market power if its Learner Index is smaller. B) A firm’s Learner Index is smaller if the market demand is less elastic C) A monopoly market has a smaller deadweight loss when the monopoly has a larger Learner Index. D) A firm’s Lerner Index becomes smaller if a product has a new close subsidy.
17) Consider a monopoly market. The firm’s marginal cost function is mc(Q)=2Q. The market demand function is Qp=30-p/2. What is the monopoly’s optimal price and quantity?
A) p=$50,Q=5
B) p=$20,Q=10
C) p=$30,Q=15
D) p=$40,Q=10
18) This question is a continuation on question 17). How much is the social loss due to monopoly’s market power?
A) $50
B) $60
C) $40
D) $30
19) This question is a continuation on question 17). Suppose the government wishes to reduce the social loss through tax. Which of the following statements is correct?
A) A specific tax of $10 will eliminate the deadweight loss.
B) A specific tax of $20 will eliminate the deadweight loss.
C) A specific tax of $30 will eliminate the deadweight loss.
D) Taxing the monopoly will increase the deadweight loss.
20) This question is a continuation on question 17). Suppose the government considers using subsidy to reduce deadweight loss. Which of the following statements is correct?
A) Giving subsidy will increase the social loss.
B) A subsidy of $30 per unit will eliminate the social loss.
C) A subsidy of $10 per unit will eliminate the social loss.
D) A subsidy of $40 per unit will eliminate the social loss.
21) Suppose firms in the competitive market for cell phone are identical and can enter or exit the market freely. Each firm’s long-run average cost function is, and marginal cost function is . How much will each firm produce in the long run?
A) 6 units.
B) 8 units.
C) 3 units.
D) 10 units
22) This question is a continuation on 21).
Suppose the market demand for cell phone is . How many firms will there be in the long run equilibrium?
A) 50
B) 82
C) 164
D) 212
23) Competitive equilibrium maximize total welfare because
A) Firms make positive economic profits in the short run.
B) Firms make zero economic profit in the long run
C) Marginal value placed on the last unit by consumers equals to the marginal cost of producing that unit.
D) Firms may produce at a loss in the short run.
24) Consider the following information for a simultaneous move game: If you advertise and your rival advertises, you each will earn $5 million in profits. If neither of you advertise, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $15 million and the no advertising firm will earn $1 million. If you and your rival plan to be in business for only one year, the Nash equilibrium is
A. For each firm to advertise.
B. For neither firm to advertise.
C. For your firm to advertise and the other not to advertise.
D. None of the statements associated with this question are
correct.
25) Consider the following entry game. Here, firm B is an existing firm in the market, and firm A is a potential entrant. Firm A must decide whether to enter the market (play "enter") or stay out of the market (play "not enter"). If firm A decides to enter the market, firm B must decide whether to engage in a price war (play "hard"), or not (play "soft"). By playing "hard", firm B ensures that firm A makes a loss of $1 million, but firm B only makes $1 million in profits. On the other hand, if firm B plays "soft", the new entrant takes half of the market, and each firm earns profits of $5 million. If firm A stays out, it earns zero while firm B earns $10 million. Which of the following are Nash equilibrium strategies?
A. (enter, hard) and (not enter, hard).
B. (enter, soft) and (not enter, soft).
C. (not enter, hard) and (enter, soft).
D. (enter, hard) and (not enter, soft).
26) Firms A must decide whether or not to introduce a new product. If Firm A introduces a new product, Firm B must decide whether or not to clone the product. The payoff structure of the game is depicted in the above tree diagram. The sub-game perfect Nash equilibrium to this game is
A. Firm A plays "Introduce"; Firm B plays "Clone" if Firm A plays "Introduce".
B. Firm A plays "Do Not Introduce"; Firm B plays "Clone" if Firm A plays "Introduce".
C. Firm A plays "Introduce"; Firm B plays "Do Not Clone" if Firm A plays "Introduce".
D. Firm A plays "Do Not Introduce"; Firm B plays "Do Not Clone" if Firm A plays "Introduce".
The following question are based on this game, where firms one and two must independently decide whether to charge high or low prices.
27) Which of the following are Nash equilibrium payoffs in the one-shot game?
A. (0, 0).
B. (5, -5).
C. (-5, 5).
D. (10, 10). 28) Which of the following are the Nash equilibrium payoffs (each period) if the game is repeated 10 times?
A. (0, 0).
B. (5, -5).
C. (-5, 5).
D. (10, 10). 29) Suppose the game is infinitely repeated. Then the "best" the firms could do in a Nash equilibrium is to earn ___ per period.
A. (0, 0)
B. (5, -5)
C. (-5, 5)
D. (10, 10)
Short answer question
Suppose there are two consumers in the market with the following demand curves.
There is a single firm in the market whose marginal cost function is mc(Q)=Q. Suppose the firm does not have fix cost.
a) Suppose the firm can identify each consumer’s demand function. It offers two-part tariff (F1,P1) to consumer 1 and (F2,P2) to consumer 2. As is discussed in class, F stands for the lump sum fee and P stands for the price per unit. What is the optimal two-part tariff for each consumer? (10 points)
Consumer 1’s demand is Q=10-P. The competitive equilibrium is p=5, Q=5. The firm should set unit price P1=5 because it implements the efficient consumption. Consumer surplus is 12.5. Therefore, the fee F1=12.5.
Consumer 2’s demand is Q=6-P. The competitive equilibrium is p=3, Q=3. By the same argument above, P2=3, F2=4.5.
b) Suppose the firm knows that consumers have different demand functions but it cannot tell who is consumer 1 and who is consumer 2. (15 points)
I) How much profit does the firm make by offering (F1,P1) to both consumers? (5 points)
(F1,P1) allows the firm to extract the entire surplus from consumer 1. So, profit from consumer 1 is 25. Consumer 2 will not accept (F1,P1) because the fee is too high. So the firm’s total profit is 25.
II) How much profit does the firm make by offering (F2,P2) to both consumers? (5 points)
F2,P2 allows the firm to extract the entire surplus from consumer 2. So, profit from consumer 2 is 9. Given P2=3, consumer 1 will buy 7 units and consumer surplus is 24.5. So, consumer 1 will accept the offer. The firm will receive fee F2= $4.5. In addition, the revenue from the 7 units is 3*7=21, and the cost is 7*7/2=24.5. As a result, the firm’s profit from consumer 1 is 4.5+21-24.5=1. Its total profit is 9+1=10.
III) Can the firm implement the efficient consumption for both consumers and extract the entire consumer surplus? (5 points)
No. Since consumers have different demand curves, the firm has to give up some surplus to consumer 1 or cannot sell to consumer 2.