Exam: Introductory Microeconomics
(ECON10004_2021_SM2)
Started: Nov 10 at 15:03
Quiz Instructions
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Instructions:
The exam has two parts. Part A has 10 multiple choice questions each worth 2 marks. Parts
B has 3 questions each worth 14 marks and Part C has 2 questions each worth 19 marks.
There are two components of the exam. First in the Quiz, to do the MCQ and to read Parts
B and C questions. You must answer MCQ in the quiz and see the other questions from the
quiz and answer using pen and paper or any other computer form like word of notepad.
Make one pdf file for all parts B and C written answers to submit in the second component of
the exam to upload file. When you finally finish writing up all your answers only then you
should submit quiz. This is very important to follow because once you submit the quiz, you
will not be able to get back to it again. There is only one attempt for exam quiz.
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The exam has 30 minutes reading time + 3 hours writing time + 30 minutes submission time.
So from the start of your exam you must stop writing after 3hours and 30minutes. The extra
30minutes is for submission only.
2 ptsQuestion 1
Create excess demand.
Create excess supply.
Trade occurs at a lower price than the equilibrium.
None of the other options.
Consider a perfectly competitive market. The industry demand curve is
Q = 5-3P. The industry supply curve is Q = 4P. Then, a price ceiling of
will
D S
2 ptsQuestion 2
Consumer surplus is always lower than producer surplus
Producer surplus is always lower than consumer surplus
A tax on the consumers may increase total surplus
A subsidy on the consumers may increase total surplus
None of the other options
In a perfectly competitive market equilibrium, which of the following are
true?
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2 ptsQuestion 3
A lower international price
A positive supply shock in the domestic market
A positive demand shock in the domestic market
An export tax
None of the above
Suppose a domestic market in a country is perfectly competitive. The
domestic market is small and cannot influence the international price.
Assuming the country exports to other countries, which of the following
may increase the quantity demanded in the domestic market?
2 ptsQuestion 4
Increase domestic consumer surplus
Increase domestic producer surplus
Increase domestic total surplus (including tariff revenue)
Increase domestic quantity supplied
None of the other options
Suppose a domestic market in a country is perfectly competitive. The
domestic market is small and cannot influence the international price.
Assume the country imports from the international market. Which of the
following are correct about the effect of an import tariff being imposed?
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2 ptsQuestion 5
Without government intervention the market will over-produce relative to the
efficient quantity
Marginal social cost is lower than marginal private cost
Marginal social benefit is higher than marginal private benefit
A subsidy to the consumers can achieve efficiency
None of the other option
Consider production involving a negative externality. Which one of the
following statements is true?
2 ptsQuestion 6
Player B
U D
Player A
U 5, 3 4, 4
D 3, 7 5, 6
In which of the following games can you use iterated elimination of
dominated strategies to find a Nash equilibrium?
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Player B
U D
Player A
U 4, 3 1, 1
D 4, 2 5, 6
Player B
U D
Player A
U 5, 3 4, 4
D 7, 7 5, 6
The beauty contest game
None of the other options
2 ptsQuestion 7
It has at least one Nash equilibrium in pure strategies
It always has exactly one Nash equilibrium
If a player has a strictly dominant strategy, it must be part of a Nash equilibrium
Which of the following are true for a simultaneous-move game?
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No player can have higher payoffs than his payoff in a Nash equilibrium
None of the other options is true
2 ptsQuestion 8
There is no deadweight loss
Every consumer pays the same price
It relies on observable characteristics
It is the most common form of price discrimination
None of the other options
Which of the following is/are true about first-degree price discrimination?
2 ptsQuestion 9
A public good can be a common good
Cheesecake is a excludable good
Public roads are rival goods
Luxury goods can also be normal goods
None of the other options
Which of the following are wrong?
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2 ptsQuestion 10
Second-degree price discrimination is the most common form
Incentive compatibility constraints are useful to study third-degree price
discrimination
Compared to a single price, third-degree price discrimination is always welfare
improving.
Producer surplus with second-degree price discrimination is never lower than
that with a single price.
None of the other options are true.
Which of the following are true about price discrimination with a
monopoly?
B1) Consider the following game table for a simultaneous-move game
between A and B:
Player B
G K L Q R W
Player A
G 1, 1 4, 2 2, 2 5, 1 8, 1 1, 1
K 2, 2 5, 3 4, 4 2, 2 3, 3 1, 0
L 5, 3 3, 6 7, 6 5, 4 1, 2 2, 2
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Q 2, 3 1, 5 6, 2 4, 4 4, 1 1, 0
R 2, 2 1, 4 5, 5 3, 3 3, 3 1, 4
W 3, 2 1, 1 6, 6 0, 1 0, 1 3, 4
a) Iteratively eliminate all dominated strategies in this game. Explain the
reason for each elimination and illustrate the game table that emerges
after doing so. [6 marks]
b) Find all pure-strategy Nash equilibria in the game. Explain how you
find them. [2 marks]
A couple wants to pick their mobile service providers between Telstra and
Optus by Friday. Unfortunately, the wife is on a business trip until
Saturday, so they cannot make the decision together. The husband gets
to decide first, and the wife decides after she returns. The service of
Telstra gives the husband a value of 20, and the service of Optus gives
him a value of 22. Just before the husband’s decision, Telstra introduced
a reward program giving any customer a rebate if a family member joins
after the original customer joins. (Note that the rebate can only be
received by the family member who joins Telstra first). The rebate adds 5
to the value that the customer places on the service. The service of
Telstra always gives the wife the value of 23. The service of Optus gives
her a value of 26 if the husband also uses Optus and a value of 25
otherwise.
c) Represent the above game using a game tree. [2 marks]
d) Find all the subgame perfect Nash equilibria in pure strategies. Explain
why they are subgame perfect Nash equilibria. [2 marks]
e) Suppose the rebate is x instead of 5. Are there values of x for which
both the husband and wife choose Telstra? If yes, find the smallest
possible x with this property and explain how you find it; if no, explain
why. [2 marks]
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B2) Woolworths has two types of milk packages: 2 litres and 5 litres.
There are two types of customers: small families and large families.
There are 200 small families and 100 large families. A small family’s
value is 5 for the 2 litre milk and 6 for the 5 litre milk; a large family’s
value is 6 for the 2 litre milk and 10 for the 5 litre milk. Woolworths does
not know whether a customer has a small family or large family. The
marginal cost per litre is 1. Suppose the price for the 2-litre milk is P ,
and the price for the 5-litre milk is P . If a family does not purchase milk,
it gets a value of 0.
a) What is the participation constraint for a small family to purchase the
2-litre milk? [1 mark]
b) What is the incentive compatibility constraint for a small family to
purchase the 2-litre milk? [1 mark]
c) To maximize its profit, what prices P and P should Woolworths
choose? [4 marks]
d) Given the profit maximizing prices, what is Woolworths’s profit? What
is the total consumer surplus for the small families? What is the total
consumer surplus for the large families? [4 marks]
e) Are there other values of P and P that improve the total surplus (of
Woolworths and all families) in part d)? If yes, give an example of such
P and P . If no, explain why. [4 marks]
2
5
2 5
2 5
2 5
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B3) Suppose there are 150 buyers in the market for used cars. There
are two types of cars in the market: the high-quality cars have a 90%
chance to work, and the low-quality cars have a 40% chance to work. All
buyers value a car that works at $10,000 and a car that does not work at
$0. The buyers are risk-neutral. Sellers know the quality of their cars.
There are 70 sellers with low-quality cars, and 30 sellers with high-quality
cars. The sellers’ value of a high-quality car is $8000, and their value of a
low-quality car is $5000.
a) What is the value of a high-quality car to a buyer? What is the value of
a low-quality car to a buyer? [2 marks]
b) Suppose the buyers do not know the quality of cars. With all the
sellers in the market, what is the maximum price that a buyer is willing to
pay for a car? [2 marks]
c) If the buyers are only willing to pay the maximum price solved for in
part b), are the high-quality car sellers willing to sell? How about the low-
quality car sellers? [2 marks]
d) Combine your answers in parts b) and c), explain which sellers sell
their cars in the market, and what is the range of possible prices in the
market. [3 marks]
e) Suppose there are 70 sellers with high-quality cars and 30 sellers with
low-quality cars. Is it possible that the high-quality car sellers are willing
to sell? If yes, explain when they are willing sell. If no, explain why. [3
marks]
f) Explain how the percentage of sellers in the market with high-quality
cars affects the possibility of high-quality cars being sold. Use no more
than four sentences. [2 marks]
C1) Only elves live inn Rivendell. Elves in Rivendell are expert jewelry
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makers. In the perfectly competitive market for jewelry in Rivendell, the
demand and supply are given by
Q = 10– 2P
Q = 5P
Jewelry made in Rivendell is also desired by humans who live in the
world outside Rivendell. Jewelry can be sold to those humans in a
perfectly competitive world market where Pw = 2. Jewelry can be traded
within Rivendell and in the world outside.
a) What will be the price at which trade of jewelry occurs? What quantity
will be sold to elves in Rivendell and what quantity will be exported? [3
marks]
b) Calculate the producer surplus and consumer surplus in Rivendell,
and illustrate them in a demand and supply graph. [3 mark]
c) In 2021, humans are badly affected by Covid, and all of them have to
stay at As a result, no human buys any jewelry. Assume no one else
outside of Rivendell buys jewelry. Elves are immune to Covid, and hence
the demand within Rivendell stays the same as before COVID. What is
the competitive equilibrium (P , Q ) at Rivendell in 2021? [2 marks]
d) To increase the producers’ surplus back to the pre-Covid level, Elrond,
the King of Rivendell, decides to host regular parties, so the elves have
more chance to show off their jewelry. As a result, the demand in
Rivendell becomes Q =10 – 2P+x if Elrond spends x to host the parties.
What will be the new equilibrium quantity traded and price? [3 marks]
e) As a result of the new demand in part d), what will be the expression
for producer surplus at the new equilibrium? [2 marks]
f) How much should Elrond spend on the parties, so that the producer
surplus in part e) is the same as the pre-Covid level? [4 marks]
g) Given the expenditure x you derived in part f), what is the resulting
total surplus? Is it higher than the total surplus in the environment of part
b)? Explain whether the King’s party plan is a good idea [2 marks]
D
S
CE CE
D
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C2) Company A is the only supplier of glass in Big Apple City used for tall
buildings’ exteriors. Its marginal cost of production is c =1, and it has no
other production costs. The demand for such glass in Big Apple city is
Q =2-P. Company B in Jersey City produces the same glass and is
considering whether to expand to Big Apple city. If it enters, it needs to
get a permit to allow it to be a supplier in the Big-Apple city at a cost of
L=0.5, which does not vary with quantity of output, and its marginal cost
of production is c =0.5. If it expands to the Big-Apple city, companies A
and B both supply to the market, and the market price P satisfies
Q +Q =2-P, where Q is company A’s production level and Q is
company B’s.
a) If company B expands to the Big-Apple city, what is the resulting price
in a Nash equilibrium? [5 marks]
b) Company B hires a consulting company to advise whether it should
expand to the Big-Apple city. If you’re running the consulting company,
what is your advice? Explain your advice. What is the largest value of the
permit cost L such that you would advise company B to enter the market?
[5 marks]
c) Suppose both companies are in the market of Big-Apple city. Company
A persuades the mayor of the city to pass an environmental law. Because
of its production technology Company B is affected by the law, and to
meet the new environmental standards its marginal cost of production
increases by 0.7. However, Company A has a technology which meets
the requirements of the law, so its marginal cost does not change. As a
result, Company B’s business starts to suffer.
What are the profits of both firms after the law is passed? [3 marks]
d) After the law in part c) is passed, if company B can use company A’s
A
D
B
A B A B
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Saved at 12:13
technology and hence avoid the increase in its marginal cost due to the
environmental law, what would be each firm’s profit? [3 marks]
e) After the law in part c) is passed, company B is considering to
purchase a license from Company A to use A’s patented production
technology. If you are the manager of Company A, how much should you
charge for the license? [3 marks]
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