Which of the following statements is NOT correct?
A. Information plays an important role in the economy.
B. Asymmetric information may lead to the disappearance of a market.
C. It is always desirable to have more information than the person one is trading with.
D. Adverse selection will not occur if there is no asymmetric information.
The Dansby-Willig index measures the potential for a change in social welfare by
examining the effect of changes in industry:
A. production cost.
B. output.
C. revenue.
D. profit.
You are the manager of XYZ Inc. and must decide how much output to produce to
maximize your firm’s profit. XYZ and its rival, ABC Corp., produce a good that
consumers view as essentially identical. These two firms make up the entire industry, so
the market price for the good depends on the total amount produced by the two firms. A
survey reveals that the market price of the product depends on total market output as
follows:
XYZ and ABC each use labor, materials, and machines to produce output. XYZ
purchases labor and materials on an as-needed basis; their machines were purchased
three years ago and are being depreciated according to the straight-line method. XYZ’s
accounting department has provided the following data about its unit production costs:
Reports from industry experts suggest that ABC’s cost structure is similar to XYZ’s cost
structure and that technological constraints require each firm to produce either 100 units
or 200 units of output.a. Briefly explain which costs are relevant for your decision, and
why.b. Write this game in normal form.c. How many units should XYZ produce: 100
units or 200 units?
Suppose the demand for X is given by Qx
d = 100 – 2PX + 4PY + 10M + 2A, where PX
represents the price of good X, PY is the price of good Y, M is income and A is the
amount of advertising on good X. If advertising on good X increases by $10,000, then
the demand for X will
A. decrease by $20,000.
B. decrease by $100,000.
C. increase by $100,000.
D. increase by $20,000.
Four firms control the market for a particular good, resulting in an HHI of 2,900. Total
industry sales are $500, and it is known that two firms each have sales of $175. If each
of the remaining two firms have the same sales, then we can conclude that the
remaining two firms each have a market share of:
A. $125.
B. $75.
C. 0.15.
D. 0.50.
The market demand in a Bertrand duopoly is P = 15 – 4Q, and the marginal costs are $3.
Fixed costs are zero for both firms. Which of the following statement(s) is/are true?
A. P = $3
B. P = $10
C. P = $15
D. None of the answers is correct.
Snowpeak Ski Resort offers a price for a lift ticket that is barely over its marginal cost,
but the high equipment rental fee keeps generating big profits. Which pricing strategy is
the management using?
A. Price discrimination
B. Two-part pricing
C. Commodity bundling
D. Cross-subsidization
As additional firms enter an industry, the market supply curve
A. shifts to the right.
B. shifts to the left.
C. remains the same.
D. none of the statements associated with this question are correct.
The property that rules out indifference curves that cross is:
A. completeness.
B. transitivity.
C. diminishing marginal rate of substitution.
D. independence.
Refer to the following payoff matrix:
The Nash equilibrium for the simultaneous-move game depicted in the payoff matrix is:
A. {(A,a) and (A,b)}.
B. {(A,a)}.
C. {B,b)}.
D. There is no pure strategy Nash equilibrium to this game.
Suppose a worker is offered a wage of $8 per hour, plus a fixed payment of $100 per
day, and he can use 24 hours per day. What is the equation for the worker’s opportunity
set? (E is total earnings and L is leisure.)
A. E = 100 – 8L
B. E = 192 – 8L
C. E = 292 – 8L
D. None of the statements is correct.
If firms are in Cournot equilibrium:
A. each firm could increase profits by unilaterally increasing output.
B. each firm could increase profits by unilaterally decreasing output.
C. firms could increase profits by jointly increasing output.
D. firms could increase profits by jointly reducing output.
Refer to the figure below. Suppose that the marginal benefit of writing a contract is
$100 and the marginal cost of that contract is $50. Based on this information, the
optimal contract length should:
A. be increased.
B. be decreased by half.
C. be decreased by two-thirds.
D. be held constant at the contract length where MB = 100 and MC = 50.
Two identical firms compete as a Cournot duopoly. The demand they face is P = 100 –
2Q. The cost function for each firm is C(Q) = 4Q. Each firm earns equilibrium profits
of:
A. $1,024.
B. $2,048.
C. $4,096.
D. $512.
At any point on an indifference curve, the slope indicates:
A. the market rate of substitution between the two goods.
B. the way the consumer’s budget is allocated between the two goods.
C. how the total satisfaction of the consumer changes with different market baskets.
D. None of the statements is correct.
Suppose market demand and supply are given by Qd = 300 – 4P and QS = -50 + 3P. The
equilibrium price is:
A. $35.
B. $40.
C. $50.
D. $60.
Consider the following entry game: Here, firm B is an existing firm in the market, and
firm A is a potential entrant. Firm A must decide whether to enter the market (play
“enter”) or stay out of the market (play “not enter”). If firm A decides to enter the
market, firm B must decide whether to engage in a price war (play “hard”), or not (play
‘soft”). By playing “hard,” firm B ensures that firm A makes a loss of $2 million, but
firm B only makes $2 million in profits. On the other hand, if firm B plays ‘soft,” the
new entrant takes half of the market, and each firm earns profits of $4 million. If firm A
stays out, it earns zero while firm B earns $8 million. Which of the following are
perfect equilibrium strategies?
A. (enter, soft)
B. (not enter, soft)
C. (enter, hard)
D. (not enter, hard)
You are a manager in a perfectly competitive market. The price is $14. Your total cost
curve is C(Q) = 10 + 4Q + 0.5Q2. What level of output should you produce in the short
run?
A. 5
B. 8
C. 10
D. 15
The marginal cost in the table is:
A. increasing at an increasing rate.
B. decreasing at an increasing rate.
C. increasing at a constant rate.
D. decreasing at a decreasing rate.