Document 6531738

Answer to sample exam 1 . In a prisoner's dilemma game a dominant strategy would mean that one of the players:__D__ A. Follows the moves of the opponent no ma?er what the opponent does B. Knows the payoff matrix outcomes while the other does not C. Is sure to come out with the most preferred outcome no ma?er what the other does D. Will benefit most from one par3cular move no ma7er what the opponent does 2. According to the negaFve income tax, the breakeven income level for a program whose tax credit is $3,000 and whose tax rate is 30 percent would be: __A____ A. $10,000 B. $6,000 C. $4,500 D. $9,000 3. Which of the following markets can most accurately be described as monopolisFcally compeFFve? _A_ A. Toothpaste B. Milk C. Electricity D. Apples 4. In which of the following decisions is the security of property rights likely to be an important consideraFon? _C_ A. The decision to plant a tree in the yard of the house you own b. The decision to plant pansies in the garden of the house you are renFng C. The decision to build a factory in Argen3na (a country that recently na3onalized an oil company) D. All of the above 5. In the case of a common property (shared) resource, why do individuals acFng independently make decisions based on average producFvity rather than marginal producFvity? Making decisions based on marginal produc3vity requires coordina3on because a poten3al user makes the choice not to use the resource in order to keep returns higher for the others who do use the resource. Someone has to make an individual sacrifice for the good of the group. 6. Some arguments for government intervenFon in the economy are based on efficiency and some are based on equity. Explain the differences between these two arguments and give one example of each. Efficiency: role of government is to facilitate compe33ve markets and correct a market failure. Examples: enforce laws, prevent monopoly, manage externali3es, provide public goods Equity: markets may be working but society does not like the outcome. Example: reduce income inequality, unemployment, hunger; disaster relief 7. Brad and Angelina are neighbors. Brad never mows his yard, rakes his leaves, or trims his hedges. His overgrown yard is not only an eyesore, and it is pulling down the value of Angelina's house. According to the Coase theorem, what is the soluFon to this problem? If there are no nego3a3on costs, and if Brad has the right to keep his yard as overgrown as he wants, then Angelina can pay him to clean it up. If Angelina has the right to a clean neighborhood and untarnished property values, then Brad can pay her the reduc3on in the value of her house to avoid mowing his yard. . 8. There are 3 kinds of monopoly price discriminaFon. Describe 2 of them •  Third-­‐degree price discriminaFon –  MulF-­‐market price discriminaFon –  Charging different prices in different markets •  Second-­‐degree price discriminaFon –  QuanFty price discriminaFon –  Price varies with the quanFty consumer buys •  First-­‐degree price discriminaFon –  Perfect price discriminaFon –  Firm sells each unit at the maximum amount any customer is willing to pay for it 17.$A$monopolist$faces$the$demand$function$P$=$16$8$Q$and$has$a$cost$function$=$.25Q2.$$$
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a. (2$points)$$On$the$graph$below,$draw$the$demand$curve,$the$marginal$cost$curve,$and$the$marginal$
revenue$curve.$$$Note8the$MC$curve$$should$go$through$the$origin$but$doesn’t$seem$to$on$this$
graph).$$$
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b. (2$points)$$Calculate$the$monopolist’s$profit$maximizing$output$(Q*m)$and$corresponding$price$(P*m)$
and$the$competitive$market$equilibrium$(Q*ce,$P*ce).$Draw$them$on$the$graph.$
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Profits$are$maximized$when$MR$=$MC.$$$
MR$=$1682Q.$MC$=.5Q$$$1682Q=.5Q$=>2.5Q=16=>Q*m$=16/2.5=$6.4.$
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When$Q*m$=6.4,$P*m$=16.6.4=$9.6$
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In$CE,$P=MC$=>$168Q=.5Q=>$16=1.5Q$=>$$Q*ce$$=$16/1.5$=$10.67.$$
At$$Q*ce$$$=$10.67$,$P*ce$=$$16810.67=5.33$
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c. (2$points)$Calculate$the$consumer$and$producer$surplus$under$monopoly,$and$identify$these$areas$
on$the$graph.$$$$$
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CS$under$Monopoly$=$.5$*6.4$*(1689.6)$=$$20.48;$PS$under$monopoly$=$6.4*(9.683.2)$+.5*6.4*3.2$=51.2$
Review for exam 3 • 
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Monopoly (Lecture 19 and 20) Imperfect compeFFon (Lecture 21) Property rights (Lecture 22) ExternaliFes (Lecture 23) Public goods (Lecture 24) Equity and income inequality (Lecture 25) Monopoly - Terms you should know
Monopoly / monopolist
Natural Monopoly
Barriers to entry
Marginal Revenue
Market power
Price markup ratio (Lerner index )
First /Second/ Third Degree Price
Perfect Price Discrimination
Discrimination
Quantity Discrimination
Multi market discrimination
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•  Explain the difference between perfect compeFFon and monopoly •  Solve profit maximizaFon problem using the output rule (find P*, Q*,π) •  Explain why monopolist never operates on the inelasFc porFon of the demand curve. •  Calculate the price markup according to price elasFcity •  Explain why monopolist does not have a supply curve •  Calculate CS, PS and DWL and illustrate them on the demand/MC curve graphs. •  Explain the condiFons that enable price discriminaFon •  Determine how a monopolist sets prices in different markets, understand the relaFonship between price and elasFcity in different markets. •  Explain how the monopolist captures CS using 2nd-­‐degree or 1st-­‐degree price discriminaFon •  Explain the welfare property of first/second/third degree price discriminaFon Imperfect compeFFon-­‐Terms • 
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Imperfect compeFFon Oligopoly MonopolisFc compeFFon Prisoners dilemma game Strategy Payoff Nash equilibrium Product differenFaFon Product variety Imperfect compeFFon – What you should know and be able to do: •  Why and how firms can be inter-­‐dependent •  ImplicaFons of imperfect compeFFon for outcomes (P, Q) and social welfare •  Use game theory to analyze firm decisions –  Payoffs –  Strategy –  Best response (define and find in a payoff matrix) –  Dominant strategy (define and find in a payoff matrix) –  Nash equilibrium (define and find in a payoff matrix) Property rights -­‐ terms Property rights Types of use rights Types of decision rights Bundles of rights Security of property rights Property rights regimes (private, public, common) •  Tragedy of the (unregulated) commons • 
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Property rights– what you should know •  Importance for property rights for economics •  Why property rights should be both secure and flexible •  Explain and calculate the impact of insecure property rights on economic decisions •  Calculate opFmal use of a shared resources when users coordinate acFons and when they don’t ExternaliFes-­‐Terms ExternaliFes •  Costs of negoFaFon PosiFve externaliFes •  Efficient responses to externaliFes NegaFve externaliFes Reciprocal nature of externaliFes •  Liability for externaliFes •  Coase theorem • 
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ExternaliFes– what you should know/be able to do •  Explain and show why market outcomes are not opFmal in presence of externaliFes •  Analyze externaliFes between 2 parFes in a game theory framework (outcomes, payoffs, private and social benefits and costs) •  Know when and how the Coase theorem applies to policy decisions •  Analyze the costs and benefits of alternaFve approaches to managing externaliFes (negoFaFon, regulaFon, tax). Public goods -­‐ terms • 
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Economic efficiency Pareto efficiency Public goods Non-­‐rival (non-­‐diminishing) Non-­‐excludable Common pool resources Club or toll or collecFve goods •  Willingness to pay for public goods (individual and aggregate) •  Total willingness to pay and total cost for public goods •  Public goods provision •  Free riding •  Voluntary contribuFon to public goods •  Private contracts •  By products of public goods Public goods – what you should know/
be able to do •  IdenFfy whether goods are non-­‐rival and or non-­‐excludable •  Explain and show using WTP and cost curves why the market generally doesn’t result in opFmal producFon of public goods •  Analyze the advantages and disadvantages, especially in terms of incenFves, of alternaFve methods of providing public goods (taxes, voluntary contribuFons, etc) Equity -­‐ terms •  Income inequality •  Rawls criFque of marginal producFvity system •  Veil of ignorance •  Public choice •  AnF poverty programs and policies (eg negaFve income tax) •  Cost benefit analysis •  Program evaluaFon •  Rent seeking Equity– what you should be able to do •  Explain the roles of government in the economy and their jusFficaFons (efficiency and equity) •  IdenFfy different reasons for limiFng income inequality in society •  Analyze anF poverty programs and their impacts on beneficiary income and labor supply (using budget constraints) •  Use voFng and cost benefit analysis to determine whether a program should be and/or will be implemented •  Use program evaluaFon results to determine whether a program had an impact