Equilibrium: Supply and Demand and Price

Test Version A SEMESTER I EXAMINATIONS Mid-Term Assessment ECON 30110 Microeconomics II Time Allowed 50 bitutes Instructions for Candidates This exam counts for 30% of the mental faculty Grade. All questions carry equal marks. Note in that respect is NO banish marking Correct function is worth 1 mark. No exercise or more than one dissolvent, go away twain receive a 0 mark. Incorrect answer pass on receive a 0 mark. Attempt all 20 questions. Shade in the box in the appropriate space with a HB pencil on the retort piece of paper. Write the test version at the top of the RESPONSE SHEET You may use the paper provided to make notes or calculations to help you.Instructions for Invigilators foreign language/English dictionaries ar permitted. Non-Programmable Calculators atomic number 18 permitted NO MOBILE PHONES ALLOWED 1. If twain people in a pure exchange economy permit identical utility functions, indeed they a) may unavoidableness to raft if their bare(a) rates of substitution are different b) exit compliments to mountain if they are on the contract cut back c) pull up stakes not need to trade if their consumption bundles are not Pareto-efficient d) go out totally want to trade if they are not at their endowment e) may want to trade if the terms ratio is not equal to one nswer a If MRSA is not equal to MRSB, the two consumers allow be able to trim a mutually in effect(p) trade. Mutually beneficial trade ordain not occur only when the allocation of resources among A and B is already efficient. In the case of our two-consumer economy, MRSA=MRSB indicates an efficient allocation of healthys (on contract fold). 2. Suppose in a two-good (X and Y) two-person (Ann and Bob) exchange economy, the MRS for person A is YA/XA and the MRS for B is YB/XB. The kernel amount of X is 40 and the total amount of Y is 40.Ann has an sign endowment of 10 units of X and 30 of Y, while Bob has the remainder. This implies a) No trade allow take plac e. b) Ann will give out some of Y to Bob in exchange for X. c) Ann will give some of X to Bob in exchange for Y. d) Ann will give some of X and Y to Bob. e) at that place is no enough information to make whatsoever predictions Answer b MRSA = 30/10 = 3 Ann will give 3Y for 1X (or 1Y for 1/3X) MRSB = 10/30 = 1/3 . Bob will give 1Y for 3X (or 1X for 1/3Y) Ann will trade Y for X (gives 1Y for min 1/3X and Bob accepts .. n exchange for 1 Y will give up to 3X) 3. An Edgeworth quoin is shown for individuals A and B, along with the contract curve. Which of the allocations b through i can be r separatelyed through free trade from a, and once they sustain been reached no cross out ahead mutually beneficial trade is possible? a) Allocations b, e and f only b) Allocations c, i and f only c) Allocations d, c, i, g and h only d) Allocations c and i only e) None of these Answer d Given endowment a, only fates in spite of appearance the lens shaped area are mutually beneficial, or pareto high-performance (so points c, i and f).That is to say, any point outside of this lens would result in at least one of the individuals being worsened off compared with point a. However, at only the points on the contract curve illustrate outcomes that are pareto efficient where the indifference curves are just tangent (MRS of A and B are equal). That is to say, pareto efficiency think ofs that no one can be made better off without someone else being made worse off. So all the gains from trade are exhausted and no further mutually beneficial trade is possible. Point f is not on the contract curve, represents a case where MRS of A and B are different, and and whence a case where further mutually beneficial trade is possible. ) 4. An Edgeworth Box is shown for individuals A and B. The endowment point E represents the initial allocation of the goods X and Y. A worth simple eye is shown passing through points E, A and B, representing a presumptuousness bell ratio of PX/PY. At th is assumption charge ratio, which of the following statements is True? a) We are at a warring sense of proportion ) To achieve a competitive equilibrium, the bell of good Y will rise and/or the determine of good X essential dip c) To achieve a competitive equilibrium, the value of good X will rise and/or the expense of good Y must make up d) To achieve a competitive equilibrium the toll of both goods must rise e) We cannot achieve a competitive equilibrium habituated the initial endowment Answer b At the given price ratio, there is excess ask for Y and excess supply of X. This means that the price of good Y will rise and/or the price of good X must fall.Process continues until all excess want and supply are eliminated, and IC tangent to each other (on the Contract curve) and to the price line (which will now be flatter. So in the competitive equilibrium all commercializes clear, MRSA = MRSB = PX/PY. (see lecture overheads) 5. Suppose the takings possibilities for t wo countries, A and B, producing two goods, X and Y, are as follows A B X 2 7 Y 4 7 They can each produce any linear combination as well. Measuring X on the horizontal axis, the joint production possibility frontier a) will spin away from the job at 7 units of X. ) will veer toward the origin at 7 units of X. c) will kink away from the origin at 2 units of X d) will kink toward the origin at 2 units of X e) will not gravel a kink answer a conjointly the countries can produce either a total of 9X or 11Y. MRT of A is 4/ 2= -2 MRT of B is 7/7 = -1 Country B has comparative advantage in X (gives up 1Y for supererogatory 1X whereas country A needs to give up 2Y for an additional X). Country A has a comparative advantage in production of Y (gives up 1/2 X for additional 1Y whereas B must give up 1X for additional Y) Jointly past can produce 9 X and 0 Y or 11Y and 0 X.These define the pinks of the joint PPF. Kink arises where both countries specialise in good in which shoot a comparative advantage so B produces only X (i. e. 7X) and A produces only Y (i. e. 4Y) If jointly produce more than 7X then B produces only X, and A both X and Y (with MRT of -2). If jointly produce more than 4Y then A produces 4Y and B both X and Y (with MRT of -1). Hence answer a 6. Competition results in the efficient product mix because a) the slope of the production possibility frontier will equal the slope of the contract curve. b) the dispersion of the final outturn is Pareto efficient. ) producers are curryting MRT equal to minus the price ratio while consumers are ensnareting MRS equal to minus the price ratio ensuring that MRT will equal MRS. d) consumers are on the contract curve e) none of these answer c ( see ego assessment sheet 2, Q1, part iv. 7. One test of whether a soused is a increasing monopoly is to check whether the firm is in operation(p) in the expandable portion of its take up curve. Why is this a relevant test and what would the centering be if the firm were maximizing revenue? a) If a firm were operating in the dead portion of the demand curve, it could nobble its price and annex profit.Revenue is maximized when elasticity equals 1. b) If a firm were operating in the inelastic portion of the demand curve, it could raise its price and increase profit. Revenue is maximized when elasticity equals 0. c) If a firm were operating in the elastic portion of the demand curve, it could raise its price and increase profit. Revenue is maximized when elasticity equals 1. d) If a firm were operating in the elastic portion of the demand curve, it could raise its price and increase profit. Revenue is maximized when elasticity equals 0. e) None of these. Answer a see lecture and also self assessment sheet 3, question 1 part (v) for related question) 8. cipher a firm that is the sole producer of a homogeneous product. It faces a merchandise demand function of Q = one C P , where P is the price of the good, and Q is the quantity of the good demanded. The firms be of production are given by 40Q. The profit tap price is then given by a) P = ascorbic acid b) P = 60 c) P = 30 d) P = 70 e) None of these solution d Monopoly. proceedss ? = TR-TC Profit max where MR = MC Q = coulomb P and hence P = blow Q So TR = degree centigradeQ Q2 So MR = 100 2Q TC = 40Q so MC = 40 MR = MC implies 100 2Q = 40Thus Q = 30 Therefore P = 100 30 = 70 9. Consider a firm that is the sole producer of a homogeneous product. It faces a market demand function of Q =100 P , where P is the price of the good, and Q is the quantity of the good demanded. The firms be of production are given by 40Q. Then the firms Lerner index is equal to a) 1/2 b) 3/4 c) 11/7 d) 1 e) None of these Answer e none of these From earlier question, optimal P = 70 Lerner index = (p-c)/p = (70 40)/70 = 30 / 70 = 3/7 10. This figure shows the demand and court curves veneering a monopoly. 80 60 40 20 800 600 400 two hundred 0 The deadweight loss of th e monopoly is a) 48000 ) 4000 c) 2000 d) 32000 e) None of these Answer c Draw in MR curve cuts horizontal axis at ? Q of demand function, and has same intercept at the D on the vertical axis. MR cuts horizontal axis at Q = 40 Setting MR = MC allows monopoliser to charge P = 600 (and output signal of Q = 20) (note alternatively, from picture can see that expression for demand function is P = 800 10Q .. when Q = 0 then P = 800 .. and slope given by 800 / 80 = 10 Hence, TR = 800Q 10 Q2 and so MR = 800 20Q. Set MR = MC we get Q = 20 and substituting into inverse demand we get P = 600) Competitive output occurs where P = MC = 400 and so Q = 40DWL = area of shaded triangle = ? (600 400) * (40 20) = 100*20 = 2000 11. Suppose a monopolists price elasticity of demand is 5, and the marginal cost of production equals 80. The monopolists profit maximising price is then equal to a) 75 b) 400 c) 16 d) 100 e) Cannot be computed with the information given Answer d Lerner index = (p-c)/p = 1/e So (p 80)/p = 1/5 Hence answer for p gives p = 100 12. If the government regulates a natural monopoly by forcing it to set a price equal to Marginal Cost then a) the natural monopoly will still make high profits. b) the natural monopoly will shut down ) the natural monopolys marginal cost curve will shift down. d) the natural monopolys marginal cost curve will shift up. e) the natural monopoly will earn zero profits answer b. Natural monopoly has MC below AC. So p = MC would mean loss which would mean exit 13. perfect price discriminating monopolist a) generates a deadweight loss to society. b) Provides quantity discounts to customers buying larger quantities c) charges each buyer her reservation price. d) charges different prices to each customer based upon different costs of delivery. e) reduces, but does not eliminate, consumer surplus nswer c see lecture. With perfect price discrimination each consumer charged reservation price, which allows monopolist to fully convey c onsumer surplus (so CS is zero) and taps total social welfare (so no deadweight loss) 14. A monopoly sells to two countries, and resales between the countries are impossible. The demand functions of the two countries are given as P1 = 100 Q1 P2 = 120 2Q2 The monopolists marginal cost is 30. The profit maximising monopolist will set prices as follows a) P1 = 65 and P2 = 75 b) P1 = 35 and P2 = 22. 5 c) P1 = 68. 33 = P2 d) P1 = 100 and P2 = 60 ) None of these Solution a Profit max monop will choose p1 to max profit in country 1, and choose p2 to max profit in country 2. We start two separate demand functions. Hence, this implies MR1 = MC and set MR2 = MC TC = 30Q TR1 = 100Q1 Q12 MR1 = 100 2Q1 = 30 MC Solving Q1 = 35 And hence P1 = 100 Q1 = 65 TR2 = 120Q2 2Q22 MR2 = 120 4Q2 = 30 MC Solving Q2 = 45/2 = 22 ? And hence P2 = 120 2Q2 = 120 45 = 75 15. both firms, A and B, selling identical products face an inverse market demand function given by P = 100 Q, and each have a const ant marginal cost of 40.The firms simultaneously choose quantities to maximise profit. soused As reception function can then be written as f) qA = 30 qB g) qA = 30 + ? qB h) qA = 60 qB i) qA = 30 ? qB j) None of these Answer d DEMAND P = 100 Q two firms in the industry, so Q = qA + qB Hence we can write P =100 qA qB Profit function for firm A = TR TC = P qA C Thus, ? A = 100qA qA2 qAqB 40qA Firm A will choose qA to maximise profit, given the qB set by its rival B .. First order limit for profit maximisation then is A / ? qA = 100 2 qA qB 40 = 0Rearranging, we find qA = (60 qB) / 2 = 30 ? qB .. this is firm As reaction function in order to maximise its profit, firm A will choose and output qA that is a best response to qB equal firms, so similarly qB = 30 ? qA . this is firm Bs reaction function in order to maximise its profit, firm B will choose and output qB that is a best response to qA 16. 2 firms, A and B, selling identical products face an inverse ma rket demand function given by P = 100 Q, and each have a constant marginal cost of 40.The firms simultaneously choose quantities to maximise profit. The equilibrium outcomes are k) P = 40 and qA = 30 = qB l) P = 60 and qA = 20 = qB m) P = 70 and qA = 15 = qB n) P = 100 and qA = 20 = qB o) None of these Answer b Solving reaction functions 1) qA = 30 ? qB 2) qB = 30 ? qA Substituting equation (2) into equation (1) we can then solve for the optimal qA that A should choose to maximise profits. qA = 30 ? (30 ? qA) qA = 20 Since we have identical firms, we know that similarly we can solve for qB = 20 merchandise quantity Q = qA+ qA = 40 And we can solve for the market price.Since P = 100 Q this implies that P = 60 17. In a Bertrand model with differentiated products p) price is independent of marginal cost. q) firms set price at marginal cost. r) firms set price independently of one another. s) firms can set price in a higher place marginal cost. t) price may be either equal to or above marginal cost answer d 18. In a homogeneous good Bertrand model, the equilibrium price u) declines with the number of firms in the market v) is independent of the number of firms in the market w) is independent of marginal cost x) is above marginal cost . ) is the same as the monopoly price answer b (note n = 1 implies a monopoly and not an Oligopoly). for n = 2, p = mc .. and for all n2 price = mc so price does depend upon mc, is equal to mc, and is independent of the number of firms in the market 19. In the long run in a monopolistic competitive market, a) Firms will set P MC and produce where P = AC b) Firms will set P MC and produce where P AC c) Firms set P = MC and produce where P = AC d) Firms set P = MC and produce where P AC e) Total favorable Welfare is maximised Answer a Have market power set P MC . ut no entry barriers, so in long run all profits are eroded and so P = AC and profits are zero 20. The payoff matrix for two firms, A and B, that must choose bet ween setting a senior high school or Low price strategy is shown as follows Firm B Firm A Low extravagantly Low (10 , 10) (25 , 5) High (5 , 25) (20,20) A Nash equilibrium in this game is a) Both firms set a High price b) Both firms set a Low price c) Firm A sets a Low price and firm B sets a High price d) Firm A sets a High price and firm B sets a Low price e) There is no nash equilibrium in this game Answer b