Econ 111 - Principles of Economics - Accelerated Treatment - Second Midterm Examination - Fall 2013
Q1) Explain if the following statements are true or false.
a) When a monopolist takes over an industry that used to be perfectly competitive we expect to see a higher equilibrium price, lower quantity produced, lower consumer surplus, and society as a whole is also worse off. (Hint: Assume constant returns to scale, graph and explain.)
b) Firms A and B are two identical firms in a Cournot Duopoly. Assume that the market demand in this industry is given by P=100 - 2Q and the marginal cost: MC = 20. True or false, show your work and explain: Firms A and B each will produce quantity qA=qB=20, when they are in a Cournot equilibrium.
Q2) In the market for toothpicks the demand is given by P = 30 - 2Q, and the supply of toothpicks is given by P =Q, where P is the price of a case of toothpicks and Q the quantity of cases. A quantity tax of t= 3 is imposed in this market (a tax of $3 per case of toothpicks).
a) Graph this situation in a supply/demand graph.
b) What is the incidence of this $3 quantity tax? (Exactly how much of the tax do consumers and how much do producers pay?)
Q3) Mandy and Chris have to take an Economics exam. They both have to decide whether to study hard or to be lazy. The exam is graded on a curve so the average letter grade will be a B in any case. If both study hard or both are lazy, they both get a B. If one of them studies, while the other one is lazy, the hard working one gets an A, while the sluggard gets a C. Getting an A has a value of 100, a B is 50 and a C is 0. The cost of working hard is 30, while being lazy is for free.
a) Set up the payoff matrix for Mandy and Chris and explain if there is a Nash equilibrium (or Nash equilibria) in this game.
b) Suppose that instead of behaving non-cooperatively, Mandy and Chris decide to collude. What is the equilibrium (or equilibria) in the collusion game, if any?
Q4) An economy has no government sector and no international trade. One year, consumption spending in this economy equals $100 billion, planned investment spending equals$200 billion, and total output equals $700 billion.
a) Is this economy in equilibrium? Explain why or why not.
b) What is the unplanned increase in inventories in this economy?
c) What is total investment in this economy?
d) "This economy must be in equilibrium because the total of consumption ($100 billion) and investment ($600 billion) equals output ($700 billion)." Do you agree with this statement? Explain why or why not.
Q5) Consider an economy with no international trade. One year, consumption spending C in this economy is C = 100 + 0.9Yd, where Yd is the disposable aggregate income (Yd = Y - T). Planned investment I = 40, and government expenditure G = taxes T = 50.
a) Solve for the equilibrium level of output algebraically.
b) What is the value for the investment multiplier in this economy?
c) The next year the government is interested in stimulating the economy and is considering 3 different ways of doing it:
(i) with an increase in planned investment to the new level of I = 60 (an increase of 20), and no other changes in fiscal or monetary policy.
(ii) with a decrease in taxes to the new level of T = 20 (a decrease by 30), and no other
changes in fiscal or monetary policy.
(iii) with a decrease in taxes and government expenditure to the new level T = G = 10 (a decrease in both T and G by 40).
The government's goal is to increase employment and aggregate production in this economy to the highest possible level. Which one of the three alternatives above would you recommend and why? Should the government follow (i), (ii) or (iii)? Show your work, EXPLAIN your answer.