Econ 203 Prof. Ergin Bayrak Spring 2014 Name: TA: Homework 2 PART I - MULTIPLE CHOICE QUESTIONS 1. Based on the figure below, assuming there are no fixed costs, the firm s marginal product curve slopes upward at levels of output between and the firm s average product curve slopes upward at levels of output between. A) 4 & 7; 4 & 7 B) 0 & 7; 4 & 7 C) 4 & 7; 0 & 4 D) 0 & 4; 0 & 7 2. Marginal cost is equal to A) Total cost minus fixed cost B) The change in fixed cost that results from a one-unit increase in output C) The change in total variable cost that results from a one-unit increase in output D) The total cost of a firm s production
3. The table above shows the total product schedule for Rick s Lawn service, a yard care company. The total product schedule shows: A) Increasing marginal returns when the 6 th worker is hired B) Decreasing marginal returns when the 1 st worker is hired C) First increasing then decreasing marginal returns D) Output first increases then decreases 4. A firm that is a price taker faces A) An elastic supply curve B) An inelastic supply curve C) A perfectly elastic demand curve D) A perfectly inelastic demand curve 5. If a perfectly competitive firm raised the price of its product above the short run equilibrium price A) Its profits would increase B) The quantity of output it sells decreases to zero C) Rival firms will follow suit and raise their prices too D) The firm will be forced to advertise more 6. A perfectly competitive firm s short run supply curve is A) Its total cost curve above the AVC
B) Its marginal cost curve below the marginal revenue curve C) Its marginal cost curve above the AVC curve D) Horizontal at the market price 7. For a monopoly, when a demand curve is downward sloping, the slope of the marginal revenue curve is the demand curve A) Always equal to the slope of B) Half as steep as C) Twice as steep as 8. Relative to a competitively organized industry, a monopoly produces output, charges prices, and earns. A) More; higher, economic profits B) Less; lower; economic profits C) Less; lower; zero profit D) Less; higher; economic profits 9. If there are two firms in an industry and each has 50 % market share, then the Herfindahl-Hirschman index equals A) 2500 B) 2800 C) 5000 D) 6600 10. Industries in which firms enjoy positive profits are likely to in the long run. A) Contract B) Expand C) Neither expand nor contract
PART II - ANALYTICAL QUESTIONS Answer the following questions completely, including the factual and conceptual basis for your answer. Show all your calculations and steps you took to arrive at the answer. Correct but not explained answers will not receive full credit. 1. A Monopolist has the cost structure MC(q) = ATC(q) = 10 for any q, and faces the demand P = 30-2Q. A) (3 points) What is the Marginal Revenue curve, optimal monopoly output and price? B) (3 points) What would be the efficient price and quantity in this market, ie if the market was perfectly competitive? C) (4 points) What would be the producer surplus, consumer surplus and deadweight loss under monopoly? Calculate and show on graph.
2. Consider the following data for a perfectly competitive seller: Output Total Cost TVC MC ATC AVC 0 50 1 90 2 120 3 140 4 170 5 210 6 260 7 330 A) (2 points) Fill the columns above How much will the firm produce in the short run and what will be the net profits/losses if the market price is.. B) (2 points) $60? C) (2 points) $25? D) (2 points) What is the shutdown price for the firm, in the short run? E) (2 points) What is the price below the firm exits this market in the long run?
3. X s Price/Y s Price High Price Medium Price Low Price High Price 9,8 8,5 15,6 Medium Price 7,5 6,6 13,8 Low Price 8,6 4, 10 12,9 Refer to the above payoff table for a duopoly. The first number in the parentheses in any box is X s profit and the second number is Y s profit. A) (6 points) What is the best response action for firm X when Y is known to choose i) High Price ii) Medium Price iii) Low Price Similarly, what is the response action for firm Y when X is known to choose i) High Price ii) Medium Price iii) Low Price B) (2 points) Is there any dominant strategy for X? Is there a dominant strategy for Y? C) (4 points) Find a Nash equilibrium for this game.