Demand in a market dominated by two firms (a Cournot duopoly) is determined
according to: P = 300 ‘“ 4(Q1 + Q2), where P is the market price, Q1 is the quantity
demanded by Firm 1, and Q2 is the quantity demanded by Firm 2. The marginal cost for
each firm is constant; MC = $60.
(a) Derive an equation for Firm 1’s revenue.
(b) Determine each firm’s profit-maximizing output level and the resulting market price.
(c) What is the profit-maximizing level of output if the duopoly firms merged and
formed a single monopoly?
In a sealed-bid auction, a firm with a reservation price of $48,000 submits a bid of
$40,000. If its probability of winning is .75, then its expected profit from the auction is:
a) $8,000.
b) $2,000.
c) $6,000.
d) $4,000.
e) $2,500.
The following (incomplete) payoff table depicts the net benefits to the United States
and the European Union (EU) of reducing carbon emissions. Carbon quantities are in
billions of tons and monetary amounts are in billions of dollars. For the United States,
the marginal benefit, MB, is $40 for each ton reduced; for the EU, MB = $50 per ton.
Each side benefits regardless of who reduces the emissions. For instance, if the EU
reduces emissions by 0.6 billion tons and the U.S. does nothing, the US enjoys a benefit
of (40)(0.6) = $24 billion, as indicated in the table. For the U.S., the marginal cost (MC)
of reducing emissions is $60 per ton; for the EU, MC = $70 per ton.
(a) Complete the missing entries in the table by computing each side’s net benefit. (Net
benefit is simply total benefit minus total cost and can be positive or negative).
(b) Determine the (Nash) equilibrium outcome when each side acts independently of
the other (state the reduction each side will choose in equilibrium). Is this a prisoner’s
dilemma? If the two sides were able to negotiate an emissions agreement, what would
be the likely outcome?
(c) Alternatively, suppose the U.S. and the EU allot permits allowing the holder to
release carbon emissions, (where the total amount of permits sets the maximum amount
of carbon emissions a region can produce). Some commentators urge that the two sides
go beyond the 1 billion ton total reduction indicated in the table. Would this increase
overall social net benefits? Explain briefly. (Provide a qualitative answer).
Which of the following is true of the Cournot model of a duopoly?
a) The products sold by the firm are imperfect substitutes.
b) The equilibrium price in a Cournot duopoly is higher than the price in a monopoly.
c) The demand curve facing each firm is horizontal.
d) The market price is determined by the output produced by the firm with the larger
market share.
e) The duopoly equilibrium lies between the pure-monopoly and purely competitive
outcomes.
In a sealed-bid auction, a firm with a reservation price of $480,000 submits a bid of
$400,000. If its probability of winning is .75, then its expected profit from the auction
is:
a) $60,000
b) $75,000
c) $80,000
d) $300,000
e) There is not enough information to provide an answer.
Contractor A is negotiating to build a warehouse for Firm B to be completed in 75 days.
Contractor A’s estimated cost is $200,000. Pushing back the completion date by 15 days
would allow it to reduce its cost by $30,000. The value to Firm B of the warehouse is
$250,000 if completed in 75 days and $235,000 if completed in 90 days. A mutually
beneficial, efficient deal:
a) means completion of the warehouse construction in 90 days at a price greater than
$235,000.
b) means completion of the warehouse construction in 90 days at a price between
$170,000 and $235,000.
c) is not possible as there is no zone of agreement.
d) means completion of the warehouse construction in 75 days at a price between
$200,000 and $250,000.
e) is possible only if contractor A agrees to build the warehouse in 75 days.
Assume that Burger King, a fast food chain, enters into a franchise agreement. The
royalty paid to Burger King by the franchisee is calculated as a percentage of the
franchisee’s revenue. Given that the franchisee faces a downward-sloping demand
curve, which of the following is likely to be true?
a) The franchisee’s revenue-maximizing output will be greater than its
profit-maximizing output.
b) To maximize revenue, Burger King will want the franchisee to produce at the level
where total revenue is positive but falling.
c) The franchisee will produce at the level where the slope of the total revenue curve is
zero in order to maximize profits.
d) The profit-maximizing level of output for the franchisee will be at the level where
marginal revenue is less than marginal cost.
e) To maximize revenue, Burger King will want the franchisee to produce at the level
where marginal revenue equals marginal cost.
If the shadow price of a given resource is $100 and the cost of expanding the capacity
of that resource is $80 per unit, then the expansion of the capacity will:
a) earn positive profits.
b) earn zero profit, but the firm will stay in business.
c) temporarily earn negative profits.
d) not be a rational decision.
e) not affect the profit level.
Oliver undergoes a standard medical test while at his regular checkup. The
test is 90% reliable in detecting a form of cancer (C) that is found in 2% of
the population. In particular, Pr(+|C) = .90. The test is also 90% reliable in
screening out cancer, that is, Pr(‘“|H) = .90.
(a) If Oliver tests positive, how likely is it that he actually has cancer? If he
tests negative, what is his cancer risk?
(b) Persons who test negative, and who actually have cancer, are able to
sue for malpractice. Plaintiffs in such legal suits are awarded $250,000 on
average (to cover medical expenses, pain and suffering, and legal fees).
What is the hospital’s expected monetary liability due to the risk of
incorrect negative tests?
In contrast to simple regression, multiple regression considers:
a) several dependent variables rather than one.
b) several independent variables rather than one.
c) more than one dependent and independent variable.
d) multiple equation specifications in order to find the best statistical fit.
e) both times-series data and cross-section data.
In a linear programming problem, the inequalities, X + 2Y ≤ 12 and 3X + 4Y ‚
28, hold as binding constraints. The problem’s optimal solution would be:
a) X = 4, and Y = -4.
b) X = 4, and Y = 8.
c) X = 4, and Y = 4.
d) X = 8, and Y = 4.
e) X = 12, Y = 0.
A pure public good:
a) is provided by private firms for the benefit of the public.
b) exhibits diminishing individual benefits the greater the number of users.
c) is nonrival and nonexclusive.
d) provides the same level of welfare to each user.
e) is financed by tax revenues rather than individual user fees.
The following matrix shows the pricing strategies and resultant profits (in thousands of
dollars) for two profit-maximizing firms.
Table 9-1
Refer to Table 9-1. If Firm A sets a high price, Firm B will:
a) also set a high price.
b) earn a profit of $35,000.
c) follow the low-price strategy.
d) earn a profit of $30,000.
e) earn a lower profit than Firm A.
The price elasticity of demand is defined as the ratio of the _____ other factors held
constant.
a) percentage change in quantity demanded to the percentage change in price
b) percentage change in the price of an input to the percentage change in the price of the
good
c) change in the price of a good to the change in the total revenue
d) percentage change in price of the good to the percentage change in the consumers’
income
e) percentage change in quantity demanded to the percentage change in the price of a
competitor’s good
Suppose, at its current output level, a firm’s marginal profit is positive. Therefore, to
maximize profit, it should:
a) decrease output until marginal profit is zero.
b) increase output because MR is less than MC.
c) increase both its output and its price.
d) increase output because MR is greater than MC.
e) increase output until it is producing at full capacity.
Which of the following is true of barometric models?
a) Barometric models accurately predict changes in trends.
b) Barometric models search for patterns among different variables over time.
c) Barometric models determine the magnitude of changes in different variables within
a given time frame.
d) Barometric models forecast changes in one variable induced by changes in other
variables at a particular point of time.
e) Barometric models explain changes in market outcomes induced by changes in
demand or supply.
A firm’s demand curve is estimated to be Q = 400 ‘“ 5P, where Q is quantity and P is the
price of the good. At P = $20, the point elasticity of demand is _____.
a) ‘“0.25
b) ‘“0.067
c) ‘“0.33
d) ‘“.67
e) ‘“1.33
List and explain the various forms of oligopolistic cooperation, which may benefit all
firms, and lead to greater profitability.
A firm produces a good in two factories: one in Tucson and one in Phoenix.
Historically, the plants’ long-run average costs have been comparable. Engineers have
found that output elasticity at the Tucson plant is 1.1, while at Phoenix it is .93. A senior
production manager has recommended expanding the scale of production in Tucson
over the next few years and cutting production in Phoenix. Examine the validity of this
proposal.
Based on your understanding of monopolistic competition, list five examples of real
firms that operate in monopolistically competitive markets.
Carefully define returns to scale, and explain how this differs from marginal returns.
What are the major sources of information that can be used to estimate demand? What
are the major benefits and drawbacks of each?
Dirt Diggers (DD) is a firm that excavates roadside ditches to lay drainpipe. Its output
follows the production function: Q = 10L ‘“ .1L2, where Q denotes the length of the
ditch in meters. The firm hires labor at a wage of $12 per hour. DD has received an
offer to excavate 250 meters for a price of $500. Should it accept the offer? Suppose
DD is offered as much or as little excavation work as it desires at a price of $2.00 per
meter, what is the optimal quantity that it should choose to excavate?
Explain why a private golf club might charge (1) an initiation fee, (2) an annual
membership fee, (3) rental fees for carts on the golf course, and (4) dining fees for
eating a required number of meals in the club’s restaurant. (Hint: Use the concepts of an
individual’s downward-sloping demand curve and consumer surplus)
Compare bidder strategies in an English auction versus a sealed-bid auction.