1

ECMC02
Final Exam, April 30, 2003
Time: 180 minutes
Professor Gordon Cleveland

___________________________________________ ____________________
Your name (Print clearly and underline your last name) Your student number

This exam consists of TWO PARTS. For the first part, there are 30 multiple choice questions,
each worth 2 marks, which are to be answered to the left of each question. Each question should
be answered by indicating with a BLOCK CAPITAL LETTER the alternative which is correct (if
you feel that a question is ambiguous or that no one answer is entirely correct, pick the answer
which you believe to be the "best" answer). You will receive 2 marks for each correct answer, 0
for each wrong or blank response (thus you will not be penalized for wrong guesses). For the
second part, there are three short answer and graphical problems worth a total of 40 marks. These
problems are provided at the end of the multiple choice questions, and you are to answer them in
the examination books provided.

The exam is out of 100. Your exam consists of 13 pages (counting this first page), with the
questions numbered in order beginning on the next page. Please count your exam's pages
immediately and report any problems. You should do your rough work on the backs of the exam
pages or on the extra pages in the examination booklet. FILL IN YOUR NAME NOW.
 2

PART I - 30 Multiple Choice Questions - 60 marks

1-4. The market demand curve for mineral water is given by Q = 15 - P, where Q is units of
mineral water per month and P is price (measured in dollars). There are two firms that produce
mineral water, each with a constant marginal cost of $3 per unit produced (and no fixed costs).
There are four possible duopoly models that can be used to analyze this market: the Cournot model,
the joint monopoly model, the Bertrand model and the Stackelberg model. Use this information to
answer the following questions (1 through 5).

1. What is the joint monopoly price?

A) $0 B) $3 C) $4 D) $5 E) $6 F) $7
G) $8 H) $9 I) $10 J) $11 K) $12 L) $13
M) $14 N) $15 O) $16 P) $17 Q) $18 R) $19
S) $20 T) $21 U) $22 V) $24 W) $28 X) $32
Y) more information is needed to answer Z) none of the above

2. What is the Cournot duopoly price?

A) $0 B) $3 C) $4 D) $5 E) $6 F) $7
G) $8 H) $9 I) $10 J) $11 K) $12 L) $13
M) $14 N) $15 O) $16 P) $17 Q) $18 R) $19
S) $20 T) $21 U) $22 V) $24 W) $28 X) $32
Y) more information is needed to answer Z) none of the above

3. What is the Stackelberg price?

A) $0 B) $3 C) $4 D) $5 E) $6 F) $7
G) $8 H) $9 I) $10 J) $11 K) $12 L) $13
M) $14 N) $15 O) $16 P) $17 Q) $18 R) $19
S) $20 T) $21 U) $22 V) $24 W) $28 X) $32
Y) more information is needed to answer Z) none of the above

4. What is the total amount of profit earned by the two firms together in the Stackelberg model?
A) $0 B) $13 C) $15 D) $18 E) $20 F) $21
G) $24 H) $27 I) $30 J) $32 K) $36 L) $40
M) $42 N) $44 O) $46 P) $48 Q) $50 R) $52
S) $54 T) $58 U) $60 V) $72 W) $80 X) $96
Y) more information is needed to answer Z) none of the above
 3

5. What is the total amount of output in the Bertrand model?

A) 0 B) 2 C) 4 D) 5 E) 6 F) 7
G) 8 H) 9 I) 10 J) 11 K) 12 L) 13
M) 14 N) 15 O) 16 P) 17 Q) 18 R) 19
S) 20 T) 21 U) 22 V) 24 W) 28 X) 32
Y) more information is needed to answer Z) none of the above

6. Firm #1 and Firm #2 are automobile producers. Each has the option of producing either a big
car or a small car. Each firm must make its choice without knowing what strategy the other firm
has chosen. The payoffs are shown in the matrix below with the first number in each cell
representing the payoff to Firm 1 and the second number in each cell representing the payoff to
Firm 2. What is the Nash equilibrium for this game?

Firm 2
Big Car Small Car
Firm 1 Big Car (400, 400) (1000, 800)
Small Car (800, 1000) (500, 500)

(A) Firm 1 produces Big Car and Firm 2 produces Big Car
(B) Firm 1 produces Big Car and Firm 2 produces Small Car
(C) Firm 1 produces Small Car and Firm 2 produces Big Car
(D) Firm 1 produces Small Car and Firm 2 produces Small Car
(E) There are two Nash equilibria: Firm 1 produces Big Car while Firm 2 produces Small Car, and
Firm 1 produces Small Car while Firm 2 produces Big Car
(F) There are two Nash equilibria: Firm 1 produces Big Car while Firm 2 produces Big Car, and
Firm 1 produces Small Car while Firm 2 produces Small Car
(G) There is no Nash equilibrium in this game
(H) None of the above
 4

7. We have the same two firms as in Question #6 and the same two strategies are available to each
firm and the payoffs are also the same from each pair of strategies. However, now the game is a
sequential game, rather than simultaneous. Firm #1 moves first, so firm #2 will know the first
firm=s choice before making its decision. Of course, firm #1 knows the payoffs that will result
before it makes its initial move. What is the Nash equilibrium for this game?
(A) Firm 1 produces Big Car and Firm 2 produces Big Car
(B) Firm 1 produces Big Car and Firm 2 produces Small Car
(C) Firm 1 produces Small Car and Firm 2 produces Big Car
(D) Firm 1 produces Small Car and Firm 2 produces Small Car
(E) There are two Nash equilibria: Firm 1 produces Big Car while Firm 2 produces Small Car, and
Firm 1 produces Small Car while Firm 2 produces Big Car
(F) There are two Nash equilibria: Firm 1 produces Big Car while Firm 2 produces Big Car, and
Firm 1 produces Small Car while Firm 2 produces Small Car
(G) There is no Nash equilibrium in this game
(H) None of the above

8. Ken and Barbie are the only two people in a simple exchange economy. They are given an
initial allocation of fish and chips. The total endowment for Ken and Barbie added together is four
units of fish and eight units of chips. Ken’s utility function is U = FKCK where FK is the amount of
fish consumed by Ken and CK is the amount of chips consumed by Ken. Barbie’s utility function is
U = FBCB where FB is the amount of fish consumed by Barbie and CB is the amount of chips
consumed by Barbie. Which of the following allocations are on the contract curve in the
Edgeworth exchange box?
(A) Ken has 1 fish and 1 chips while Barbie has 3 fish and 7 chips
(B) Ken has 1 fish and 3 chips while Barbie has 3 fish and 5 chips
(C) Ken has 2 fish and 3 chips while Barbie has 2 fish and 5 chips
(D) Ken has 2 fish and 7 chips while Barbie has 2 fish and 1 chips
(E) Ken has 3 fish and 6 chips while Barbie has 1 fish and 2 chips
(F) Ken has 3 fish and 4 chips while Barbie has 1 fish and 4 chips
(G) Ken has 3 fish and 5 chips while Barbie has 1 fish and 3 chips
(H) Ken has 4 fish and 1 chips while Barbie has 0 fish and 3 chips
(I) none of the above

9. Taking the information from question 8 we can say that at a pareto-efficient allocation of fish
and chips, Ken=s marginal rate of substitution of fish for chips must be:
A) 0 B) 1/5 C) 1/4 D) 1/3 E) 1/2 F) 1/1
G) 2/1 H) 3/1 I) 4/1 J) 5/1 K) none of the above

10-12. The world consists of three individuals. You are the world planner, able to choose one
from among 5 possible outcomes. For each outcome, the following table gives you the utility (in
"utils") of each individual:
 5

Outcome I II III IV V
Utility of Individual #1 6 5 3 6 7
Utility of Individual #2 11 9 12 10 1
Utility of Individual #3 12 10 10 12 1

You like all these individuals, although not necessarily equally. Questions 10 through 12 concern
this problem.
10. These 5 outcomes are the only ones possible. You are asked to list those outcomes that are
Pareto Optimal. That list is as follows:

A) I, II B) I, III C) I, IV D) I, V E) II, III

F) II, IV G) II, V H) III, IV I) III, V J) IV, V
K) I, II, III L) I, II, IV M) I, II, V
N) I, III, IV O) I, III, V
P) I, IV, V Q) II, III, IV R) II, III, V S) II, IV, V T) III, IV, V
U) I, II, III, IV V) I, II, III, V W) I, II, IV, V X) I, III, IV, V Y) II, III, IV, V
Z) I, II, III, IV, V

11. Now, assume that option I is taken away (it is no longer feasible, but the outcomes retain the
same numbers as before). List the outcomes that are now Pareto Optimal. That list is as follows:

A) II
B) III
C) IV
D) V
E) II, III
F) II, IV G) II, V
H) III,
IV I) III, V
J) IV, V
K)II, III, IV L) II, III,
V M)II, IV,
V N)III,
IV, V O) II, III,
IV, V
P)none are Pareto Optimal
 6

12 Go back to the list of five outcomes that you had in question #10 (Outcome I is feasible again).
In addition, you are given a sixth possibility, called "Outcome VI", in which the utility of
consumer #1 is 6, utility of consumer #2 is 9, and utility of consumer #3 is 13. Then you can state
that:
A) VI is Pareto Optimal
B) VI is not Pareto Optimal
C) VI is not pareto-preferred to any other option
D) VI is pareto-preferred to all other options, but is not Pareto Optimal
E) none of the above

13. Two consumers, Bill and Fred, each consume only two goods, X and Y. At the initial
endowment point in the Edgeworth Box, Fred's MRS is 1/2 while Bill's MRS is 1/4 (in both cases,
the MRS is defined as -dY/dX holding U constant). Then:
A) both benefit if Fred trades 3 units of X to Bill in exchange for 1 unit of Y
B) both benefit if Bill trades 3 units of X to Fred in exchange for 1 unit of Y
C) both benefit if Fred trades 3 units of Y to Bill in exchange for 1 unit of X
D) both benefit if Bill trades 3 units of Y to Fred in exchange for 1 unit of X
E) neither benefits from a trade because they are on the contract curve
F) to make a definitive statement about a trade, we would need more information
G) none of the above

14. An economy has two people Charlie and Doris. There are two goods: apples and bananas.
Charlie has an initial endowment of 3 apples and 12 bananas. Doris has an initial endowment of 6
apples and 6 bananas. Charlie=s utility function is U = ACBC where AC is the amount of apples
Charlie consumes and BC is the amount of bananas he consumes and ACBC is the product of these
two numbers. Doris= utility function is U = 2AD + BD where AD is the amount of apples Doris
consumes and BD is the amount of bananas she consumes. Given their initial allocation, at every
Pareto optimal allocation in the interior of the Edgeworth Exchange Box:
(A) Charlie will consume the same number of apples as Doris
(B) Charlie will consume half as many apples as bananas
(C) Doris will consume equal numbers of apples and bananas
(D) Charlie will consume a higher ratio of bananas to apples than Doris will
(E) Charlie will consume equal numbers of apples and bananas
(F) the only possible Pareto Optimal allocation is the original endowment of apples and bananas
(G) all of the above are true
(H) none of the above are true
 7

15. The following is the payoff matrix for a zero sum game involving two players. The entries in
the matrix represent the payoff received by player #1, given different combinations of strategies by
both players (player #1 may choose among 4 different strategies, called A, B, C, and D; player #2
may choose among five different strategies, called V, W, X, Y, and Z):

Player #1
A B C D
V 1 9 3 -2
W 11 9 1 -3
Player #2 X 4 9 3 10
Y 0 9 12 -5
Z 14 9 1 2

15. Assume that player #1 uses the maximin strategy, while player #2 uses the minimax strategy.
Then the result of the game will be a payoff to player #2 of:

A) -10 B) -9
C) -8 D
-5 E) -4
F) -3
G) -2 H) -1 I)
0 J) 1
K) 2
L) 3
M) 4 N) 6
O) 7
P) 8
Q) 9
R) 10
S) 11 T) 14
U) not enough information is provided to solve this problem
V) none of the above; the players will adopt a mixed strategy

16. Allocation J and allocation K are the only two possible allocations of goods amongst a group
of potential consumers. We are told that allocation K is Pareto-preferred to allocation J. We may
therefore conclude that:
A) every consumer must be better off with K than with J
B) a majority of consumers are better off with K than J
C) a move from K to J will make some consumers better off and none worse off
 8

D) a move from J to K will not make any consumers better off

E) K is pareto optimal
F) none of the above
 9

17. Consider a simple economy with two goods - food and clothing - and two consumers (Bert and
Ernie). There is an initial endowment in this simple “exchange” economy, and the initial price
ratio is Price of food/price of clothing = 3/1. At this initial price ratio, Bert wants to buy 6 units of
clothing while Ernie wants to sell 2 units of food. We can conclude that this initial price ratio is:
(A) an equilibrium price ratio
(B) too low (in other words, the ratio of the price of food to the price of clothing will have to rise
to give us equilibrium
(C) too high (in other words, the ratio of the price of food to the price of clothing will have to fall
to create an equilibrium
(D) none of the above

18. Robinson Crusoe can make 5 units of food per day if he devotes all his time to food
production. Alternatively, he can make 10 units of clothing if he spends his whole time on
clothing production. If he divides his time between the two activities, his output of each good will
be proportional to the amount of time spent on each. His friend can either produce 10 units of
food or 15 units of clothing or can produce output of each one proportional to the time spent on
producing each one. If both Crusoe and his friend regard food and clothing as perfect 1-for-1
substitutes, how should they allocate their time to get the most efficient outcome.
(A) Crusoe should produce only food and his friend should produce only clothing
(B) Crusoe should produce only clothing and his friend should produce only food.
(C) They should each spend half their time on food production and half on clothing production
(D) Both of them should produce only food
(E) Both of them should produce only clothing
(F) none of the above
 10

19. The information about the productive abilities of Robinson Crusoe and his friend is exactly as
stated in question 18. Now, however, a trading ship visits the island every day and offers to either
buy or sell food or clothing at a price of 4 dollars for a unit of food and 1 dollar for a unit of
clothing. Now, assuming that Crusoe and his friend will engage in trade if it makes sense, the
most efficient outcome will be delivered by the following allocation of productive time:
(A) Crusoe should produce only food and his friend should produce only clothing
(B) Crusoe should produce only clothing and his friend should produce only food.
(C) They should each spend half their time on food production and half on clothing production
(D) Both of them should produce only food
(E) Both of them should produce only clothing
(F) none of the above

20. Barbara and Joyce are the only two individuals represented in an Edgeworth Exchange Box.
Barbara=s utility function is represented by U = X2Y2, where X is the number of units of food and
Y is the number of units of shelter. At a Pareto Optimal allocation, Barbara has 16 units of food
and 4 units of shelter. What is Joyce=s MRSXY (marginal rate of substitution of X for Y) at this
same allocation?
A) 0 B) 0.1 C) 0.2 D) 0.25 E) 0.3 F) 0.33
G) 0.4 H)0.5 I) 0.6 J) 0.67 K) 0.7 L) 0.75
M) 0.8 N) 0.9 O) 1 P) 1.5 Q) 2 R) 2.5
S) 3 T) 3.5 U) 4.0 V) 4.5 W) 5.0 X) none of the above

21. For a two-good competitive economy that does not engage in international trade and where
consumer preferences are represented by a single set of indifference curves , the Pareto Optimal
allocation of resources and goods will:
A) occur where the Marginal Rate of Transformation is equal to the ratio of the marginal cost of
one good to the marginal cost of the other
B) occur where the isoquants are tangent to the indifference curves
C) occur where the production possibilities frontier is just equal to the ratio of the marginal costs
D) occur where the Rate of Product Transformation is just tangent to the Rate of Technical
Substitution
E) occur where the Rate of Product Transformation is equal to the Marginal Rate of Substitution
F) occur where the ratio of the marginal utilities of X and Y is just equal to the rate at which
capital can be substituted for labour in equilibrium
G) all of the above
H) none of the above
 11

22. The demand curve for a monopolistic firm is represented by the linear demand function: P = A –
2bQ, where A and b are positive constants. The marginal cost curve for this firm is MC = c, where
c is a positive constant. The quantity at which total profit will be maximized for this firm will be:
A)(A - c)/b
B) 4b/(A - c)
C) A + b + c
D) 2b/(A + c)
E) (A - c)/2b
F) (A + c)/b
G) (A - c)/4b
H) 2b/~2b
I) none of the above

23. A profit-maximizing monopolist is selling its output for a price of $30 in a market where the
marginal cost is 10; you can conclude that the elasticity of demand at this output is:
A) 0 B) -0.1 C) -0.2 D) -0.25 E) -0.3 F) -0.33
G) -0.4 H) -0.5 I) -0.6 J) -0.67 K) -0.7 L) -0.75
M) -0.8 N) -0.9 O) -1 P) -1.5 Q) -2 R) -2.5
S) -3 T) - 3.5 U) -4.0 V) -4.5 W) -5.0 X) none of the
above

24. Two players are playing a game of “Rock, Scissors, Paper”. The payoffs are shown in the
zero-sum game matrix below. The matrix shows the payoffs to player #1. What is the maximin
and the minimax of this game?

Player #1
Rock Scissors Paper
Rock 0 -1 +1
Player #2 Scissors +1 0 -1
Paper -1 +1 0

A) 0, 0 B) 0, +1 C) 0, -1 D) -1, 0 E) -1, +1 F) -1, -1

G)+1, 0 H) +1, -1 I) +1, +1 J) none of the above
 12

25. If there is a negative externality in a particular competitive industry:

A) the firms involved will produce too little of the output.
B) the firms involved will produce too much of the output.
C) the firms involved will produce the right amount but will earn too much profit.
D) the firms involved will produce the right amount but will have costs which are too high.
E) none of the above

26. The Chamberlinian model of monopolistic competition differs from the model of perfect
competition in which of the following assumptions:
(A) free entry and exit
(B) product homogeneity
(C) large number of firms
(D) perfect information
(E) none of the above

27 In a two-good general equilibrium framework (good X and good Y), monopolization of the
production of good Y will normally have the following effects:
A) increase the price of good Y
B) decrease the price of good Y
C) increase the price of good X
D) decrease the price of good X
E) increase the production of good Y
F) decrease the production of good Y
G) increase the production of good X
H) decrease the production of good X
I) answers A and F
J) answers B and E
K) answers C and H
L) answers D and G
M) answers A and F and D and G
N) answers B and E and C and H
O) none of the above
 13

28. Which of the following oligopoly models has the highest overall combined profit level?
(A) the Cournot model
(B) the Bertrand model
(C) the Stackelberg Leader-follower model
(D) The joint monopoly model
(E) The prisoner’s dilemma model
(F) None of the above

29. In the long run, firms in the Chamberlin monopolistically competitive model:
(A) make positive economic profits
(B) make negative economic profits
(C) make zero economic profits
(D) may make either negative or positive economic profits depending on demand
(E) can’t answer without more information about the character of firms entering the industry in the
long run
(F) none of the above

30. A profit maximizing, single-price, monopolist with positive marginal costs always produces on
the portion of the demand curve which is:
(A) elastic
(B) inelastic
(C) unit elastic
(D) perfectly elastic
(E) perfectly inelastic
(F) wherever marginal cost and marginal revenue intersect – you cannot be more explicit than this
(G) none of the above
 14

Part II – Short Answer and Graphical Questions. Total = 40 marks

These questions should be answered in the exam booklets provided. Show your calculations
for all questions.

(15 marks)
31. There is a monopoly producer of cement in the Halifax-Dartmouth area of Nova Scotia.
Demand in Halifax is given by QH = 24 – PH. Demand in Dartmouth is given by QD = 24 –
2PD. P refers to the price in dollars per unit of cement. Q refers to the quantity of cement per
month. The cost of producing cement is constant at $6 per unit and there are no fixed costs.

(A) if this monopoly producer is able to separate these markets and charge a different price in
each one, what amount will be produced in each market and what price will be charged?
How much profit will the monopolist earn?

(B) What are the deadweight losses /efficiency losses in each of these two markets?

(C) If the monopolist is unable to price discriminate between these two markets, what amount will
be produced and what price will be charged? What will be the marginal revenue at the
optimum output? How much profit will the monopolist now earn?

(D) How much is the deadweight loss now in this market?

(E) In terms of Consumer Surplus, are consumers in Halifax and Dartmouth better or worse off as
a result of switching to a single-price monopoly from the price discrimination situation? Or
does it depend whether you are from Halifax or Dartmouth? Explain your result.
 15

(15 marks)
32.Suppose that Robinson Crusoe produces and consumes fish (F) and coconuts (C). Assume that
he works 200 hours per month and he can produce either fish or coconuts according to the
following production functions:
F = (LF)2
C = (LC)2
where LF is the number of hours per month spent fishing and LC is the number of hours spent
gathering coconuts. As a result, LF + LC = 200.
Robinson Crusoe’s utility for fish and coconuts is given by U = (FC)2

(A) if Robinson Crusoe cannot trade with the rest of the world, what will the optimal levels of fish
and coconuts be? What will Robinson Crusoe=s total utility be? What will be the Rate of Product
Transformation of fish for coconuts?

(B) Now suppose that trade is opened up and that Robinson Crusoe can trade 2 coconuts for 1 fish
whenever he wants (the price ratio between fish and coconuts is 2 to 1 – in other words 2[FP – FC ]
= [CC – CP] where the P subscripts refer to amounts produced and the C subscripts refer to amount
consumed). What amount of fish and coconuts will Robinson Crusoe produce and how much will
he consume? What will his level of utility be?

(10 marks)
33. Jon and Susan are playing a repetitive matching game in which either player has two possible
strategies: 1) hold out one finger, 2) hold out two fingers. Jon has taken “evens” which means that
he wins any round of this game in which both players hold out the same number of fingers. Susan
has taken “odds” which means that she wins any round of this game in which each player holds out
a different number of fingers. The payoffs for this game are as follows: If Jon holds out one finger
and so does Susan, Jon wins 5 points. If Jon holds out one finger and Susan holds out two fingers,
Susan wins one point. If Jon holds out two fingers and Susan holds out one finger, Susan wins one
point. If Jon holds out two fingers and Susan holds out two fingers, Jon wins one point.

A) Draw the matrix of payoffs and strategies which describes one period of this game. The
payoffs to Jon should appear in your matrix.

B) Assuming that both Jon and Susan follow mixed strategies, what is the equilibrium probability
that Jon will hold out one finger? What is the equilibrium probability that Susan will hold out two
fingers? Show your calculations.