Final Exam Sample

TOTAL: 100 + 10 bonus points

Multiple choice and True/False (30%):

1. The formula for calculating firm’s profit

a. Profit= TC - MC
b. Profit= MR - MC
c. Profit = TR - TC
d. Profit = FC+ VC

2. Soup is an inferior good if

a. the supply of soup is horizontal.

b . the demand for soup rises when the price of soup falls.

c. the demand curve for soup slopes upward.

d . the demand for soup falls when income rises.

3. Good X and good Y are substitutes in consumption. If the price of good Y increases, then the

a. demand for good X will decrease.

b . the quantity supplied of good X will decrease.

c. demand for good X will increase.

d . the demand for X is unchanged.

4. Refer to Figure above

The movement from point A to point B on the graph is called

a. a decrease in supply (shift to the left).

b . an increase in supply (shift to the right).

c. an increase in the quantity supplied (movement along).

d. a decrease in the quantity demanded .

4. True or False Demand is inelastic if the price elasticity of demand is greater than 1.

5. Which of the following statements is correct?

a. A competitive firm is a price maker and a monopoly is a price taker.

b. A competitive firm is a price taker and a monopoly is a price maker.

c. Both competitive firms and monopolies are price takers.

d. Both competitive firms and monopolies are price makers.

7. True or False In oligopoly we have few firms, strategically interacting with each other
Problems (80 %):

1. (30 points) For this problem Refer to the Graph below:

a) 5 points Equilibrium Price P*= ______
Equilibrium Quantity Q*= ______

On the Graph Show P*, Q*, areas representing Consumer Surplus (CS), Producer Surplus (PS)

b) 3 points If government introduces a price ceiling = 15,

Quantity Demanded = ______
Quantity supplied = ______

Is this a surplus or deficit of the good? ______

c) 6 points Calculate Price Elasticity of Demand, if price increases from 20 to 25? Is demand elastic or
inelastic?
 Calculate Price Elasticity of Supply, if price increases from 20 to 25? Is supply elastic or inelastic?

d) 7 points Now the market is back at the equilibrium. Then, the government imposes a tax=7.5,
show the effect of this tax on the Graph, clearly labelling Price paid by buyers (Pb), Price
received by sellers (Ps), Tax (t), new quantity sold (Qt)

e) 6 points On the Graph, show areas representing Consumer Surplus (CS), Producer Surplus (PS)
and Government Revenue (GR) and Deadweight Loss from the tax (DWL)

f) 3 points Explain how the tax burden will be shared between buyers and sellers? On which
factor does the incidence of tax depend?
 2. (20 points)

The Graph Below shows a Monopolist’s Demand, MR, MC, ATC curves.

a) 5 points To maximize its profits, the Monopolist will choose Quantity (Qm) = ________
The Monopolist’s Profit-maximizing Price (Pm) = ________
Marginal Cost at the chosen quantity (MC)= ________

b) 5 points On the graph, show areas for Total Revenue, Total Costs, Profits and Deadweight Loss
(DWL)

c) 5 points Calculate: The Monopolist’s Profit = ________

d) 5 points Calculate: Deadweight Loss= ________

 3. (15 points)

With the introduction of the iPhone, Apple gained a considerable edge with respect to the
competition. Suppose that Apple has in store a new phone, the jPhone, which is significantly better
than the iPhone. The strategic question for Apple is whether to introduce it now or in a year’s time.

For rival Samsung, the question is whether to invest in a phone with features similar to the jPhone
or rather stay out of this market segment.

Payoffs are estimated as follows. If Samsung makes no investment, then Samsung’s payoff is
zero, whereas Apple gets 90 if it introduces the jPhone now and 120 if it does so in a year’s time.

If Samsung makes an investment and Apple delays its product to next year, then Apple gets 70 and
Samsung gets 20. If, however, Apple introduces the jPhone now then Apple gets 50 and Samsung
−10.
a) 2 points What kind of Market structure is this? -
monopoly
- oligopoly
- or perfect competition

b) 5 points Using the Payoff Matrix, describe the game

c) 3 points Is there a dominant strategy for Apple? What is it?

d) 5 points Find the Nash Equilibrium of the game

4. (15 points)
5 points What is Negative Externality? Provide an example of negative externality.

5 points On the Graph illustrate the effect of negative externality, labelling demand curve, the social-
value curve, the supply curve, the social-cost curve, the market equilibrium level of output, and the
efficient level of output

5 points Describe a government policy that would result in an efficient outcome. THE END