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Econ 2010-011 Spring 2014 Final Exam Part B Solution




Question;Section II:Complete all the blank entries in the given table. Then use the data to graph (toscale) the Fixed, Variable, Average Fixed, and Average Variable cost curves on one graph and graph (to scale) the Marginal, Total and Average Total cost curves on another graph. Do the shapes of all the curves conform to conventional economic knowledge?(5 points)(Difficulty? Easy)Betty?s BakeryQuantityFixedVariableTotalAverageAverageAverageMarginalofCostCostCostFixedVariableTotalCostcakesCostCostCost1$13$382$283$704$645$1106$1087$1338$185Section III: Short and Long answersQuestion A)Distinguish between Perfect Competition, Monopoly on the basis of thefollowing: Number of Sellers, Ease of entry and exit, Nature of the product, existence of deadweight loss, determination of Prices, Shape of the demand curve faced by the firm and the extent of Government intervention. In addition give an example for each of the following markets in the USA, also comment on which definition of markets seems the most realistic.(4 points) (Difficulty?Easy)Question B)Tom (Swerves)Tom (Drives Straight)Bryan (Swerves)0,0-1,+1Bryan (Drives Straight)+1,-1-10,-10Consider two drivers, Bryan and Tom, both are headed for a single lane bridge from opposite directions, each player has to options, first to Swerve and yield the bridge to the other player, second to continue to Drive Straight.The following table shows the possible outcomes for each decision combination. The numbers in each cell represent the players outcomes (+1= best outcome, -10 = worst outcome)What is the equilibrium for this game? Is there a dominant Strategy for this game? Is the equilibrium a Nash Equilibrium? Define Pareto Optimality, is the equilibrium Pareto Optimal?(4 Points) (Difficulty? Moderate)Question C)Consider the following scenario (Hypothetical)Four roommates, Keats, Shelly, Byron and Coleridge each have independent, individual internet connections, Keats? monthly internet usage is never more than 4 GB, Shelly?s monthly internet usage is never more than 3 GB, Byron?s monthly internet usage is 5 GB and Coleridge?s monthly internet usage is never more than 4GB.All four of them decide to switch to a common internet connection for the apartment and share the cost of the internet equally. The common internet connection costs a total of $20 a month and allows for 20GB of usage (downloads and uploads), after the 20 GB of usage is exhausted, every additional GB used costs $3.Six months into using the common internet connection, the roommates realize that they are on a monthly basis using more than 20GB and paying more than they had initially intended.Based on what we?ve studied in class, why do you think the roommates are overshooting the 20GB limit? Propose atleast 3 solutions to the problem (either internal or external)?(Difficulty? Moderate) (4 points) (Hint: Start by classifying the common internet connection into one of the four categories of goods we?ve studied in class. Be as detailed and explicit with your explanation of the source of the problem and the solutions to the problem)Question D)One example of price discrimination occurs in the publishing industry when apublisher initially releases an expensive hardcover edition of a popular novel and later releases a cheaper paperback edition. Use this example to demonstrate the benefits and potential pitfalls of a price discrimination pricing strategy.(4 points) (Difficulty?Difficult) (Hint: Assumedifferent points of view of benefit, the Monopolist, the consumer and the economist) [Dodraw relevant diagrams wherever necessary]Question E)Draw a graph to demonstrate the circumstances that would prevail in a perfectlycompetitive market where firms are experiencing Supernormal economic profits. Identify costs, revenue, and the economic profits on your graph. Would the firm continue to make supernormal economic profits in the long run? Explain with a Diagram.(4 points) (Difficulty?Easy)(Hint: Draw short run and long run diagrams for both the Individual firm as well as that for the market equilibrium. Show appropriate shifts in market equilibrium)


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