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Econ2010-011 Spring 2014 29th April 2014 Final Exam

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Question;Section I: Multiple choice questions (Difficulty Easy)(15 x 1 point = 15 points) (Refer to Diagram Sheet)1) Refer to Figure I. Which graph represents a market with no externality?a. Panel (a)b. Panel (b)c. Panel (c)d. None of the above is correct.2) Refer to Figure I. Which graph represents a market with a positive externality?a. Panel (a)b. Panel (b)c. Panel (c)d. Both (b) and (c) are correct.3) Refer to Figure I. Which graph represents a market with a negative externality?a. Panel (a)b. Panel (b)c. Panel (c)d. Both (b) and (c) are correct.4) Refer to Figure I, Panel (b). The market equilibrium quantity isa. Q2, which is the socially optimal quantity.b. Q3, which is the socially optimal quantity.c. Q2, and the socially optimal quantity is Q3.d. Q3, and the socially optimal quantity is Q2.5) Refer to Figure I, Panel (b). The market equilibrium price isa. P2.b. P3a.c. P3b.d. P3a - P3b.6) Refer to Figure I. The overuse of antibiotics leads to the development of antibiotic-resistantdiseases. Therefore, the market for antibiotics is shown ina. Panel (a).b. Panel (b).c. Panel (c).d. Both (b) and (c) are correct.7) Refer to Figure I, Panel (b) and Panel (c). The overuse of antibiotics leads to thedevelopment of antibiotic-resistant diseases. Therefore, the socially optimal quantity ofantibiotics is represented by pointa. Q2.b. Q3.c. Q4.d. Q5.8) Refer to Figure I, Panel (b) and Panel (c). The overuse of antibiotics leads to the developmentof antibiotic-resistant diseases. Therefore, the external cost of antibiotic overuse isrepresented bya. Q3 - Q2.b. Q5 - Q4.c. P3a - P3b.d. P4a - P4b.9) Refer to Figure I, Panel (b) and Panel (c). The overuse of antibiotics leads to thedevelopment of antibiotic-resistant diseases. Therefore, a government policy that internalizedthe externality would move the quantity of antibiotics used from pointa. Q2 to point Q3.b. Q3 to point Q2.c. Q4 to point Q5.d. Q5 to point Q4.10)A good is excludable ifa. one person's use of the good diminishes another person's enjoyment of it.b. the government can regulate its availability.c. it is not a normal good.d. people can be prevented from using it.11) Which of the following would be considered a private good?a. national defenseb. a public beachc. local cable television serviced. a bottle of natural mineral water12) In a certain city, the government is considering acquiring some land and turning it into apark (without any fences or gates). In an attempt to determine the extent to which residentsof the city would value the park, residents are asked to fill out a questionnaire. Which of thefollowing is correct?a. On the questionnaire, some residents are likely to exaggerate the valuethey associate with the park.b. On the questionnaire, some residents are likely to exaggerate the coststhey associate with the park.c. The use of such a questionnaire in cost-benefit analysis is likely to produce onlyrough approximations of residents? perceptions of the costs and benefits of a park.d. All of the above are correct.13) The Tragedy of the Commons occurs becausea. a common resource is rival in consumption.b. a common resource is underutilized.c. crimes are committed in public places.d. common resources are subject to exclusionary rules.14) An economics professor, upset about the rising cost of textbooks, proposed that hisdepartment purchase 50 copies of a statistics book so the students in the statistics class wouldnot have to purchase their own books but rather could borrow a book for the semester andthen return it for the next class to use. Which of the following strategies would not prevent acommon resource problem with the textbooks?a. Students will be required to pay a deposit for the textbook, which is refundableat the end of the semester when the book is returned in good condition.b. The textbooks are placed in a common area of the department so studentscan borrow and return them as needed.c. Students must sign a form agreeing to return the book or pay a fine equal tothe replacement cost of the book.d. The textbooks are placed in the professor?s office and will only be given to students who are registered members of the class. These students will not receivetheir final course grades until the books are returned.15) Which of the following is not a way for the government to solve the problem of excessiveuse of common resources?a. regulationb. taxesc. turning the common resource into a public goodd. turning the common resource into a private goodSection 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 graphand graph (to scale) the Marginal, Total and Average Total cost curves on another graph. Dothe shapes of all the curves conform to conventional economic knowledge? (5 points)(DifficultyEasy)Betty?s BakeryQuantityFixedVariableTotalAverageAverageofCostCostCostFixedVariableTotalCostCostCostcakes1$132$2834$38$70$645$1106$1087$1338$185Average MarginalCostSection 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 ofdeadweight loss, determination of Prices, Shape of the demand curve faced by the firm andthe extent of Government intervention. In addition give an example for each of thefollowing markets in the USA, also comment on which definition of markets seems themost realistic. (4 points) (DifficultyEasy)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 fromopposite directions, each player has to options, first to Swerve and yield the bridge to theother player, second to continue to Drive Straight.The following table shows the possible outcomes for each decision combination. Thenumbers in each cell represent the players outcomes (+1= best outcome, -10 = worstoutcome)What is the equilibrium for this game? Is there a dominant Strategy for this game? Is theequilibrium a Nash Equilibrium? Define Pareto Optimality, is the equilibrium Pareto Optimal?(4 Points) (DifficultyModerate)Question C) Consider the following scenario (Hypothetical)Four roommates, Keats, Shelly, Byron and Coleridge each have independent, individualinternet 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 GBand 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 andshare the cost of the internet equally. The common internet connection costs a total of $20 amonth and allows for 20GB of usage (downloads and uploads), after the 20 GB of usage isexhausted, every additional GB used costs $3.Six months into using the common internet connection, the roommates realize that they are ona 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 the20GB limit? Propose atleast 3 solutions to the problem (either internal or external)?(DifficultyModerate) (4 points) (Hint: Start by classifying the common internetconnection 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 theproblem)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 acheaper paperback edition. Use this example to demonstrate the benefits and potential pitfalls ofa price discrimination pricing strategy. (4 points) (DifficultyDifficult) (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 supernormaleconomic profits in the long run? Explain with a Diagram. (4 points) (DifficultyEasy)(Hint: Draw short run and long run diagrams for both the Individual firm as well as thatfor the market equilibrium. Show appropriate shifts in market equilibrium)

 

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