Introductory Economics
Eco 108
Spring 1999
Midterm 2

There are 100 points on this exam. Please print your name clearly and sign your name in the space below. Also write you social security/University ID number.

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Soc. Sec. #:
Multiple Choice(50):
Problem 1(12):
Problem 2(6):
Problem 3(16):
Problem 4(8):
Problem 5(8):
Total(100):

[I.] Multiple Choice (Each question is worth 2 points, give the best answer):
1. Which of the following is an example of price discrimination?
  - [a.] Nabisco offers cents-off coupons for its products.
  - [b.] Amtrak offers a lower price on weekend travel as compared to weekday travel.
  - [c.] Hotel rates for AAA members are lower than for nonmembers.
  - [d.] All of the above are examples of price discrimination.
2. If it is possible to make a potential Pareto-improvement, then:
  - [a.] that situation is economically efficient, but could be improved.
  - [b.] that situation is economically inefficient, but could be improved.
  - [c.] it could be Pareto efficient, but we'd have to know the exact losses to the losers and the gain to the winners.
  - [d.] taxes are reduced.
3. A price taker is a firm that:
  - [a.] must lower its price if it wants to sell one more unit of output.
  - [b.] must accept the price set by the government.
  - [c.] cannot influence the price of its product.
  - [d.] is experiencing economic losses.
4. Which of the following is not a legal barrier to entry?
  - [a.] Patents.
  - [b.] Copyright.
  - [c.] Licenses and permits.
  - [d.] Deregulation.
5. Which of the following is not a characteristic of monopolistic competition?
  - [a.] Many rival producers.
  - [b.] Differentiated products.
  - [c.] Barriers to entry and exit are low.
  - [d.] Firms are price takers.
6. A player has a dominant strategy if:
  - [a.] that player's best strategy does not depend on what other players do.
  - [b.] that player wins the game no matter what other players do.
  - [c.] no other player can play that strategy.
  - [d.] that player plays a different strategy in each situation.
7. The area underneath a demand curve and above the equilibrium price is:
  - [a.] always less than the area under the supply curve.
  - [b.] always greater than the area under the supply curve.
  - [c.] the consumer surplus.
  - [d.] the producer surplus.
8. One of the following is not a characteristic of perfect competition. Which is it?
  - [a.] Firms advertise to increase their market share.
  - [b.] Consumers pay little attention to brand names.
  - [c.] Firms pay no attention to their competitor's output levels.
  - [d.] Economic profits are zero in the long run.
9. If a firm can determine the price of its product and does so without considering how other firms in the market will react, then:
  - [a.] the firm is a price taker.
  - [b.] the firm is conducting business illegally.
  - [c.] the firm has monopoly power.
  - [d.] the firm is perfectly competitive.
10. Which of the following is not an example of a monopolistically competitive industry?
  - [a.] Fast-food restaurants.
  - [b.] Automobile repair shops.
  - [c.] Department stores.
  - [d.] Automobile manufacturers.
11. Oligopoly refers to a market structure that has:
  - [a.] continually falling average cost.
  - [b.] strategic interaction among firms.
  - [c.] many sellers offering products that are close substitutes.
  - [d.] a single seller.
12. Which of the following conditions distinguishes the monopolistic competitor from the monopolist?
  - [a.] Profit maximizing rule.
  - [b.] Downward sloping demand curve.
  - [c.] Entry barriers.
  - [d.] Short run economic profits.
13. The demand curve for the perfectly competitive industry is:
  - [a.] vertical.
  - [b.] negatively sloped.
  - [c.] positively sloped.
  - [d.] horizontal.
14. Which of the following is often considered to be a natural monopoly?
  - [a.] Hertz.
  - [b.] Burger King.
  - [c.] Local phone companies.
  - [d.] Disneyland.
15. A player's best response is the strategy that:
  - [a.] gives that player the incentive to change strategies.
  - [b.] is a dominant strategy when other players play their best strategies.
  - [c.] is a dominant strategy when other players play their dominant strategies.
  - [d.] maximizes that player's payoff, given the strategies of the other players.
16. As more substitute products are offered by new entrants into a monopolistically competitive industry:
  - [a.] the average total cost curve of the individual firm will shift downward.
  - [b.] the demand curve of individual firms will shift to the left.
  - [c.] the supply curve of individual firms will shift to the right.
  - [d.] the demand curve of individual firms will shift to the right.
17. In the Bertrand model, whenever price is above marginal cost:
  - [a.] there is a Nash equilibrium.
  - [b.] firms will lower prices until price is equal to marginal cost.
  - [c.] firms will reduce output to maintain a high price.
  - [d.] firms will form a cartel to maintain a monopoly price.
18. Deadweight social loss is:
  - [a.] the value of time people spend buying and selling goods and services.
  - [b.] the amount people would be willing to pay to eliminate the inefficiency.
  - [c.] the difference in consumer surplus between an efficient and inefficient situation.
  - [d.] minimized through use of subsidies and taxes.
19. The entry of firms into a competitive industry causes the supply curve to:
  - [a.] increase its slope.
  - [b.] decrease its slope.
  - [c.] shift to the right.
  - [d.] shift to the left.
20. Under monopoly:
  - [a.] the firm can sell more of a good only if it lowers its price.
  - [b.] average revenue is equal to marginal revenue.
  - [c.] price is always equal to marginal revenue.
  - [d.] marginal revenue is always positive.
21. Which of the following is not part of the definition of a game?
  - [a.] How many players there are.
  - [b.] The strategies for each player.
  - [c.] Who the winner will be.
  - [d.] Each players' payoffs.
22. In the model of perfect competition, firms are assumed to be producing:
  - [a.] identical products.
  - [b.] small products.
  - [c.] large products.
  - [d.] brand-name products.
23. A cartel is a group of firms that attempt to:
  - [a.] maximize individual profits while working to promote industry demand.
  - [b.] act like a monopoly by restricting output and raising prices to the monopoly level.
  - [c.] meet periodically to share industry developments.
  - [d.] cooperate to keep a cap on salaries paid to employees in the industry.
24. Legislation enacted in 1890 that still forms part of the foundation of U.S. antitrust policy is the:
  - [a.] Grant Act.
  - [b.] Clayton Act.
  - [c.] Robinson-Patman Act.
  - [d.] Sherman Act.
25. How does Nash equilibrium in the Cournot Model compare to that of the Bertrand model?
  - [a.] Price is lower and output higher in the Cournot model than the Bertrand model.
  - [b.] Price is equal to marginal cost in both models.
  - [c.] Price exceeds marginal cost in both models.
  - [d.] Price is higher and output is lower in the Cournot model than the Bertrand model.
[II.] Problems, show all work and completely label all graphs, points are in parentheses after the question
1. Suppose we have a demand curve given by, P = 70-3Q, MR = 70-6Q, and MC = AC = 10. It may help to draw a graph.
  - [a.] What are the efficient price and quantity? Given this quantity, what are the gains from trade? (4 points)
  - [b.] What are the monopoly price and quantity? Given this quantity, what are the gains from trade? (5 points)
  - [c.] How much would society be willing to pay to eliminate the monopoly in favor of the efficient outcome? (3 points)
2. If firms in a perfectly competitive industry have positive profits in the short run, what happens in the long run? Describe the chain of events, and draw the resulting long run equilibrium for a perfectly competitive firm. (6 points)
3. Suppose that there is a duopoly, with market demand given by P = 50-Q and MR = 50-2Q. The two firms have identical constant cost structures with, MC = AC = 5.
  - [a.] In the Bertrand model what does each firm assume about the other? What is the Bertrand equilibrium price, and why is this so? What is the industry output? What is the industry profit? (5 points)
  - [b.] In the Cournot model what does each firm assume about the other? If both firms produce 15 units of output, what is the market price? Is this a Cournot equilibrium? Why or why not? (7 points)
  - [c.] Suppose these two firms get together and form a cartel. What is the industry output, price, and profit? Why might this cartel fall apart? (4 points)
4. Suppose we have the following game:
  
  Table 1: Duopoly Pricing
  
  Player 1, Strategy 1 Player 1, Strategy 2
  Player 2, Strategy 1 8,9 4,2
  Player 2, Strategy 2 5,3 6,4
  - [a.] Define Nash Equilibrium. (2 points)
  - [b.] Does either player have a dominant strategy? Explain. (2 points)
  - [c.] What is a Nash Equilibrium for this game? Why? (2 points)
  - [d.] Can a game have more than one Nash equilibrium? Does this game? (2 points)
5. Pareto and potential Pareto improvements. For these questions assume that both Mary and John like cake.
  - [a.] Suppose John has two pieces of chocolate cake and Mary has two pieces of lemon cake. Suppose that they both prefer variety. Is there a Pareto improving change that can be made? If so, what is it? If not, why not? (4 points)
  - [b.] Suppose John has two pieces of chocolate cake and Mary has one piece of chocolate cake. Is there a Pareto improving change that can be made? If so, what is it? If not, why not? (4 points)

File translated from T_EX by T_TH, version 1.0.

	Player 1, Strategy 1	Player 1, Strategy 2

Player 2, Strategy 1	8,9	4,2
Player 2, Strategy 2	5,3	6,4