Economics 300
Final Exam
Due: In my Office: (COB 258) Wednesday, December 15, 2010 by 12:00 noon (MST)
The first 4 questions are MANDATORY. Questions 5-8 are OPTIONAL. If you choose
to answer the last 4 questions, the quality of those answers will be considered as
replacements for previous work if you have demonstrated improvement. PLEASE put
your best effort into demonstrating and explaining your answers. The format
requirements stated at
http://www.msubillings.edu/BusinessFaculty/Harris/Ec200format.htm
will be ABSOLUTELY ENFORCED on this exam.
1.
“Imposing an excise tax on a monopoly will cause the price to increase by the
amount of the tax.” Do you agree or disagree? (Remember, an excise tax is a
fixed tax per item sold.)
2.
Some have argued that taxing a price searcher with a lump-sum tax (tax that is
the same regardless of level of current production) and then using the tax
proceeds to subsidize that producer’s output on a per-unit basis would reduce
the efficiency loss due to monopoly (see fig. 8.5 on page 233). Others say that
this is ridiculous because the tax and subsidy would offset each other and,
therefore, have no effect on the producer’s output decision. Which position
do you believe is correct? Explain.
3.
Why would drug stores give senior citizens—those who have one of the
greatest demands for pharmaceuticals due to failing health—a discount on
prescription drugs?
4.
In class, we demonstrated the outcome of the Cournot Reaction Model under
duopoly (2 competitors) using a market demand of Q=100–P (or P = 100- Q)
a. What would be the eventual equilibrium output for each of two
competitors under the Cournot Reaction Model if the Market demand is
Q=20-P? (Assume that MC = 0).
b. How would your answer to part (a) change if MC=10?
c. Extend the Cournot reaction Model to three producers (rather than 2) who
each (and in sequence) make an output decision assuming that the other
two producers will not change their output. Use a market demand of
Q=20-P and assume that each producer has MC=0. What will be the
equilibrium quantity and price for each producer? (Assume that they each
start with one third of the monopoly market quantity.)
Optional Questions.
5.
A consumer has the choice of consuming two goods, x and y. If a tax is placed on
purchases of x only, how will that affect the budget constraint for this consumer? Is
it possible for this consumer to choose to consume more of good x after the tax than
before? If not explain why not, if yes, explain the characteristics of good x that are
necessary for this to occur. If goods x and y are perfect substitutes in consumption,
show how a tax on x alone could cause the rational consumer (who was purchasing x
before the tax) to choose to purchase no x at all after the tax is imposed
6.
Using the Hicks Decomposition, demonstrate the income and substitution effects for
a good that is inferior, but is not a Giffen good.
7.
In a price taker’s market why would a producer ever plan to produce less than
that which minimizes the LRAC (shown as output q2 in figure 6.5 in your
text)? Or would they? Explain thoroughly.
8.
Gary has been a bad boy. It seems he’s hidden something that a lot of people
would like to find. In order to get the truth from Gary, his parents decide to
have their neighbor Connie (a policewoman) ask him questions. Gary can
either tell the truth or lie. Connie can act either tough or soft. Thus, the game
they face is:
Gary
Truth
Lie
Connie
Tough
Soft
A,E
B,F
C,G
D,H
a. Explain a relationship between A, B, C, D, and E, F, G, H that will make
Lie, Soft a Dominant Strategy Equilibrium.
b. Explain a relationship between A, B, C, D, and E,F,G,H that will make
Lie, Soft a Nash Equilibrium but NOT a Dominant Strategy Equilibrium.
(By “relationship between A, B, C, D” let me know pair wise what the
necessary relationships would be…e.g., is A > B or is B > A? If the
relationship does not matter, indicate that.)