Economics 2037: Final Exam Review

Economics 2037: Final Exam Information 2017

Time:Saturday, April 22, 1:00-4:00pmPlace: ATAC 1010

Coverage:The final exam will cover the entire course but the majority of questions

will be on material covered after the midterm.

Format: Part 1: Shorter-answer questions (some choice, do 6 questions, roughly 7 pts. each)

Part 2: Longer question (material from first half of the course, 12 points)

Part 3: Longer questions (second half material (2 questions, 12each)

Example Questions: Some questions will be quite similar to those on the assignments. See also the

Midterm information sheet (still on the website).

1. Is the following true or false (provide an explanation)? A monopolist is more likely to

operate at a point on the demand curve where the price elasticity of demand is –.5 than where it is -2.0.

2. What is meant by two-part pricing (tariff)? Explain why it might make sense (provide a diagram).

3. Explain: (a) why a monopolist would like to price discriminate; (b) why may price discrimination be difficult to do in practice.

4. Say that a monopolist can divide its customers into low and high demand elasticity groups. Which group will be charged the higher price? Explain why and justify you result algebraically.

5. The market demand curve is given by P = 100 –2Q where Q = Q1+Q2 (Q1=output of firm 1 and Q2=output of firm 2). Both firms in this market act Cournot and have constant marginal costs of $10.

(a) Derive the reaction functions for each firm.

(b) Graph the two reaction functions and indicate the equilibrium. Solve for the equilibrium price.

6. Illustrate the long-run outcome for a monopolistically competitive firm. What is the role of entry in getting the model to its long-run outcome? Is the outcome inefficient? Explain.

7. (a) Draw Joe Worker’s budget constraint given that Joe is paid an hourly wage of $15

and has non-labour income of $20 per day.

(b) Add a set of indifferences curves to the diagram that show Joe’s best choice is at 8 hours.

Show how the diagram in (b) changes and how Joe’s choice changes as well.

(d) Say that a tax of 20% is imposed on Joe’s wage and non-labour income. Show how

this changes Joe’s budget constraint. Speculate on the effect on Joe’s work hours.

(e) Say that back in (b) Joe’s best choice was to not work: Illustrate this.

8. Show the effect of a minimum wage on a competitive labour market. Who wins and who loses? Explain.

9. (a) The marginal product of labour at a firm in a competitive labour market is given by: MP = 20 – 2 L where L = quantity of labour hired. If the wage rate (W) is $15 per L and the price of the output produced is $5 how much labour would a profit maximizing firm hire?

(b) Graph the outcome in (a). Illustrate the effect of the following changes: (i) price of output rises to $9; (ii) wage falls to $7 ;and (iii) productivity rises by 5 for each level of L.

(c) Say that a firm has the same MP curve as in (a), the price of output was $8 but now it is a monopsony facing the labour supply curve: W = 3L. How much labour would it hire? What would the outcome be like if the firm was able to perfectly “price” (wage) discriminate? Explain.

10. (a) Use the Supply-Demand model of a financial market to explain why interest rates on two similar assets are likely to be the same in equilibrium (provide diagrams).

(b) The Efficient Markets Hypothesis claims that changes in stock prices are unpredictable. Explain why.

11. (a) Outline a firm’s decision to hire (rent) capital (provide a diagram). (b) What factors affect the decision of a firm to supply rental capital? How does the interest rate enter this decision?

12. An asset promises to pay 100 for the next two years. It currently costs $180. Would

you buy it? (Write out the critical equation and explain what variables determine the correct answer).

13. Two people in an exchange economy have exactly the same preferences (utility function). Will they ever want to trade? Explain.

14. Say that we have a two person exchange economy with two goods (bread and cheese).

(a) At the current prices of bread and cheese, both Fred and Laurie have made best choices where their marginal rates of substitution equal 6 bread per cheese. This must be an equilibrium. True or false (explain and illustrate).

(b) At the endowment point Fred has an MRS of 6 bread per cheese and Laurie has an MRS of 3 bread per cheese. Which good will each personwish to buy more of and which good they will sell? Explain. Show a pareto optimal point the parties might trade to. Illustrate what prices might get this economy to this point.

(c) The second fundamental theorem of welfare economics says that any point on the contract curve can be supported by a competitive equilibrium. Illustrate and explain this argument.

15. (a) Illustrate production efficiency in an Edgeworth production box assuming that only two inputs are used capital (K) and labour (L). In what sense is this outcome efficient? Explain.

(b) Explain why an economy with competitive input markets is likely to achieve production efficiency.

16. (a) Explain and illustrate how the Production Possibilities Frontier (PPF) can be derived from the information in an Edgeworth production box.

(b) Say that at the current point on the PPF the slope is –3 (say 3 bread per cheese) and the consumers currently value cheese at the rate of one bread per cheese. Is this outcome pareto efficient? Explain and illustrate what is likely to happen and why.

17. Define Nash equilibrium. Is it possible to have a Nash equilibrium when players do not have dominant strategies? Explain and give examples of a game that illustrates your point.

18. (a) Draw a downward sloping demand curve for a product. Assume that MC is constant at some level “m”. On your demand curve indicate the likely outcome if the market is (i) served by a monopolist; (ii) is served by a number of perfectly competitive firms; (iii) is served by Cournotduopolists; and (iv) by Stackelbergduopolists.

(b) Compare the levels of output for (i), (iii) and (iv). Which is highest? Explain why this makes sense.

19. Say that two firms(Firm 1 and Firm 2) have the following payoffs to the strategies Enter, Don’t Enter: Firm 2

EnterDon’t Enter

Firm1EnterP1=-1, P2=-1P1=10, P2=1

Don’t EnterP1=1, P2=9P1=0, P2=0

(a) Is there a likely outcome in this game? Explain.

(b) Set this up as a sequential game with Firm 2 moving first (draw the game tree). What is the outcome?

(c) Player A proposes to split $100 with Player B. If B accepts the proposed split the split is made, if B rejects the proposed split both A nor B get nothing. What split should A propose if both parties are rational and self interested? Explain. Is this outcome plausible in practice?

20. Say that you operate of tree farm and are considering when to cut down a given stand of trees. Say that the quantity of wood in the stand grows each period by W. Say that the price of wood is ‘P’ per unit and the interest rate is ‘i’ – assume P and i are constant over time. Should the tree farm harvest the stand now? Justify your answer.