姓名：
學號：
Microeconomics II
Midterm Exam
Spring, 2009
4/23, 2009
（Notice：若題目有要求，計算過程及圖形繪製請清楚說明）
I. Multiple choice question (45 points) (請務必將答案填在 p.4 的表格)
01) The more elastic the demand curve, a monopoly
A) will have a larger Lerner Index.
B) will face a lower marginal cost.
C) will earn more profit.
D) will lose more sales as it raises its price.
Answer: D
02) Gains from trade will be possible as long as
A) people place different values on some goods.
B) people have different endowments.
C) marginal rates of substitution are equal across individuals.
D) excess supply equals excess demand.
Answer: A
03) Which of the following total cost functions suggests the presence of a natural
monopoly?
A) TC = 2Q
B) TC = 100 + 2Q
C) TC = 100 + 2Q2
D) All of the above.
Answer: B
04) If two identifiable markets differ with respect to their price elasticity of demand
and resale is impossible, a firm with market power will
A) set a lower price in the market that is more price elastic.
B) set price so as to equate the elasticity of demand across markets.
C) set a higher price in the market that is more price elastic.
D) set price equal to marginal cost in both markets.
Answer: A
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05) Suppose all individuals are identical, and their monthly demand for Internet access
from a certain leading provider can be represented as p = 5 - (1/2)q where p is price
in $ per hour and q is hours per month. The firm faces a constant marginal cost of
$1. Potential consumer surplus equals
A) $4.
B) $8.
C) $16.
D) $32.
Answer: C
06) The above figure shows the demand and cost curves facing a monopoly. A $100
per unit tax would raise price by
A) $100.
B) $50.
C) $25.
D) $0.
Answer: B
07) One difference between a monopoly and a competitive firm is that
A) only a monopoly faces a downward sloping demand curve.
B) only a monopoly maximizes profit by setting marginal revenue equal to marginal
cost.
C) only a monopoly is a price taker.
D) None of the above.
Answer: A
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08) When a firm has a monopoly in a market and also perfectly price discriminates,
total welfare
A) is minimized.
B) is lower than in a perfectly competitive market.
C) is higher than in a perfectly competitive market.
D) is maximized.
Answer: D
09) If society were to maximize the utility of its best-off member, the final allocation
would be
A) perfect equity.
B) on the contract curve.
C) Pareto efficient.
D) one in which one person gets everything.
Answer: D
10) A monopoly sets a price of $50 per unit for an item that has a marginal cost of $10.
Assuming profit maximization, the implicit demand elasticity is
A) -0.2.
B) -0.8.
C) -1.25.
D) -5.0.
Answer: C
11) Tie-in sales are most advantageous to the seller when
A) the demands for the two goods are negatively correlated.
B) the demands for the two goods are positively correlated.
C) the demands for the two goods are unrelated.
D) there are economies of scope.
Answer: A
12) If somebody posing as a vacationer were able to purchase large numbers of airline
tickets from the airlines and later resell them to business travelers,
A) multimarket price discrimination on the part of airlines would no longer be
profitable.
B) multimarket price discrimination on the part of airlines would no longer be profit
maximizing.
C) the airlines would respond by raising further the price charged to business flyers.
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D) this person would not earn any economic profit.
Answer: B
13) Product differentiation allows a firm to charge a higher price because the residual
demand curve facing the firm
A) is more elastic than the residual demand curve without product differentiation.
B) is less elastic than the residual demand curve without product differentiation.
C) is horizontal.
D) shifts to the left.
Answer: B
14) In the long run a monopolistic competitor
A) set MR = MC.
B) produces where P = AC.
C) sets P > MC.
D) All of the above.
Answer: D
15) Suppose two duopolists operate at zero marginal cost. The market demand is
p
= a - bQ. If firm 1 is the Stackelberg leader, what level of output will it choose?
A) q1 = (a - bq2)/2b
B) q1 = (a - 2bq2)/2b
C) q1 = a/b
D) q1 = a/2b
Answer: D
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2
3
4
5
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7
8
9
10
D
A
B
A
C
B
A
D
D
C
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15
A
B
B
D
D
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II. True and False (25 points) (Answer True or False and explain)
1. Ted’s initial endowment of cakes is 1, and his initial endowment of coffee is 6.
Sandra’s initial endowment is 7 cakes and no coffee. “This allocation might be
both efficient and equitable, based on the Pareto principle.”
True. The Pareto principle does not require that endowments be equitable. As
long as the endowments given are on the contract curve (where Sandra’s
marginal rate of substitution is equal to Ted’s), the solution is Pareto efficient.
2. If only two identical firms operate in a market, consumers prefer a Cournot
equilibrium.
False. Consumers will prefer a Stackelberg equilibirum since the consumer
surplus is higher at a Stackelberg equilibrium than it is at a Cournot equilibrium.
3. If a firm is a natural monopoly, a government policy that forces marginal cost
pricing will result in losses for the firm.
True. See Figure 11.9 on p 392 for the details.
4. “All you can eat” buffets are examples of product bundling, while “Kids eat
free” plans are an example of requirement tie-in sale.
True. “All you can eat” buffets are examples of product bundling. Consumers
cannot purchase the items individually, nor can they choose to not purchase
certain items in the line. Most consumers end up paying for menu selections that
they do not select. “Kids eat free” plans are an example of a product tie-in
because the children cannot eat free unless they are accompanied by a paying
adult. The only way to get the low (free) price for children is to purchase a more
expensive adult meal.
5. If all consumers have identical tastes and preferences, perfect price
discrimination is impossible.
False. Even though all consumers have identical tastes and preferences, each
consumer still possesses a downward sloping individual demand curve, which
makes the market demand curve slope downward as well. The monopolist is
unable to discriminate based on differences across individuals, but could still
discriminate based on willingness to pay for additional units.
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III. Problem (40 points)
1. If a monopolist has constant marginal cost MC = 20, and faces demand
p=80 – Q, what is the effect on consumer surplus of a $5 per unit tax on
sellers? Solve the equilibrium before and after tax. Is the tax revenue
collected less than, equal to, or greater than the consumer surplus loss plus
the reduction in profits? Draw the picture and indicate the consumer
surplus loss and tax revenue.
Ans:
The $5 tax increases MC to $25. Quantity falls from 30 to 27.5, and price
increases from $50 to $52.50. Consumer surplus falls by $71.875 (from $450 to
$378.125). Profits fall by $143.75 (from $900 to $756.25). Tax revenue collected
is $137.50 ($5 
Figure 11.4
2. The demand a monopoly faces id p=100-Q+A(1/2) , where Q is its quantity,
p is its price, and A is its level of advertising. Its marginal cost of production
is 10, and its cost of a unit of advertising is 1. What is the firm’s profit
equation? Solve for the firm’s profit-maximizing price, quantity, and level
of advertising.
Ans:
Assume one unit of advertising costs $1. The profit function is
p  (100 – Q  A1/2 )Q – 10Q – A
The resulting first-order conditions are
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 p/ A  (Q/2)A–1/2 – 1  0
 p/ Q  100 – 2Q  A1/2 – 10  0
A*  900
Q*  60
p*  70
3. In a Cournot duopoly, each firm has marginal cost MC=20, and market
demand is Q=100 - 1/2p. What are the best response functions of each firm?
What is the best output level for each? How does the total output level
compare to the cartel output level?
Ans:
First, calculate the residual demand function.
q1  100  1/2 p  q2
p  200  2q1  2q2.
Then, to derive the best-response function, set MC = MR for each firm.
MR1  200 – 4q1 – 2q2  20
MR2  200 – 2q1 – 4q2  20
q1  45 – 1/2 q2
q2  45 – 1/2 q1
The equilibrium output level for each firm is
q1  45 – 1/2 (45 – 1/2 q1)  30
q2  45 – 1/2 (45 – 1/2 q2)  30
The cartel output level is 45 (obtained by setting market MR equal to MC).
P=200 – 2Q
;
MR=200 – 4Q ; 200 – 4Q=20
;
Q=180/4=45
Thus, the Cournot output level is 1/3 greater than that of the cartel.
4. Suppose that identical duopoly firms have constant marginal costs of $10 per
unit. Firm 1 faces a demand function of q1 = 100 – 2p1+p2, where q1 is Firm 1’s
output, p1 is Firm 1’s price, and p2 is Firm 2’s price. Similarly, the demand
Firm2 faces is q2 = 100 – 2p2+p1. Solve for the Bertrand equilibrium.
Ans:
Firm 1 wants to maximize its profit:
∏ 1 = (p1 - 10) q1 = (p1 - 10) (100 – 2p1+p2)
FOC =100 - 4p1 + p2 +20 =0
Best –response function is p1 =30 + (1/4)p2.
Firm 2’s best-response function is p2 =30 + (1/4)p1.
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Nash-Bertrand equilibrium prices are p1=p2=40. Each firm produces 60 units.
5. The two people in a pure exchange economy have identical utility functions.
Will they ever want to trade? Why or why not?
Yes, they may want to trade. If two individuals are consuming different bundles and
have identical preferences, their marginal rates of substitution may be unequal and they
may gain by trading. For example, if each had the utility function U  XY, an initial
allocation of 4X, 2Y for one person and
2X, 4Y for the other, each would have a utility level of 8, and their marginal rates of
substitution would differ. By trading 1 unit of X for 1 unit of Y, each can achieve a
utility level of 9.
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