Review for Final Exam
Intermediate Microeconomics
1. What are the characteristics of a market structure that would be classified as an oligopoly? What are
the characteristics of monopolistic competition?
2. The Island of Yak is a circular atoll with a perimeter of 20 miles. In the 1950's the U.S. used the area
to test nuclear weapons. Until very recently, this left the island uninhabitable. The 500 Yakians have
recently returned to their island paradise after a court ordered the U.S. to pay the government of the Island
of Yak $10,000,000,000 in compensation. Life on the Island of Yak is now very good. In fact, the island
government is planning to establish massage parlors to help ease the stress after a long day on the
beach. They have hired you to help them determine the optimal number of massage parlors. You quickly
calculate the following information:
Travel costs are $0.50 per mile.
All 500 citizens will get one massage a day.
The 500 citizens are even distributed along the island.
Each massage parlor costs $200 per day, whatever the number of massages.
a. Show an equation describing the total travel cost as a function of the number of massage parlors.
b. Show an equation describing the total production cost as a function of the number of massage parlors.
c. What number of massage parlors would minimize the total cost to the Island of Yak? Show your work
for full credit.
3. The SU bookstore, a monopolist, faces the following TC and market demand functions for books (in
1,000s) on the SU campus.
TC = 3@Q2 + 1,000
DMKT] P = 200 - 2@Q
What is the profit maximizing price and quantity of books sold by the SU bookstore? How much profit will
the bookstore earn? Show your work for partial credit.
4. What is the distinguishing characteristic of a natural monopoly? Explain. Use the appropriate graph
in your answer.
5. Give three examples of a firm using the hurdle model to differentiate among its customers.
Determine the groups of consumers being identified. How will the price charged be different among these
types of consumers?
6. Using a properly labeled graph, discuss the pros and cons of the following types of regulations for a
Natural Monopolist.
a. Do nothing
b. Force the firm to charge the price that would lead to an efficient allocation of resources.
c. Allow the firm to charge a price that just covers ATC.
d. State ownership
e. Rate of return regulation
7.
Show (graphically and mathematically) that the MR curve will lie below a downward sloping D curve.
8.
Given the following payoff matrix, determine if dominant strategies exist for the two players. Also,
determine the Nash Equilibrium.
Firm 1's Advertised Price
Low
Firm 2's
Advertised
Price
Medium
High
Low
($90,$90)
($120,$100)
($150,$110)
Medium
($100,$110)
($140,$150)
($170,$140)
High
($110,$150)
($150,$200)
($200,$170)
(Firm 2, Firm 1)
9. Explain why a prisoner’s dilemma game that is repeated for a finite number of periods will lead to each
side cheating in each period. Explain why a prisoner’s dilemma game that is repeated for an infinite
number of periods could lead to each side cooperating in each period. What do we call this strategy?
10. What are the characteristics of a market structure that would be classified as an oligopoly?
11. Explain why a monopolist would never produce on the inelastic portion of their demand curve.
12. Two firms, Nintendo and Atari, are about to develop a new game. Each can expend a low (L),
medium (M), or high (H) amount on research and development. Their profits depends on what their rival
does. The payoff matrix below shows the outcomes under the nine possible scenarios.
Nintendo
Atari
L
M
H
L
(90, 80)
(30, 110)
(120, 40)
M
(75, 60)
(60, 50)
(110, 20)
H
(100, 70)
(85, 120)
(140, 90)
(BAtari, BNintendo)
a. Define a dominant strategy.
b. Does Nintendo have a dominant strategy? If so, what is their dominant strategy?
c. Does Atari have a dominant strategy? If so, what is their dominant strategy?
d. What is the Nash equilibrium given the above payoff matrix? Explain and give the definition of a Nash
equilibrium in your answer.
13. Consider two duopolists with identical cost functions given by:
TC(Qi) = 10Qi where i = 1,2.
The market demand is given by: P = 100 - (Q1 + Q2).
a. Find the Cournot price, outputs, and profits for the two firms.
b. Find the Stackleberg Leader-Follower price, outputs, and profits for the two firms. Assume firm 1 is the
leader.
c. Find the Bertrand price, outputs, and profits for the two firms.
d. If these two firms decided to collude, determine the price, outputs, and profits for the two firms.
Assume no one cheats.
14. Pat and Chris are competing for Casey’s affection. Both plan to visit Casey and will bring flowers,
candy, or nothing when they meet with Casey. Pat will visit first and Chris will know what gift, in any,
Casey receives. The game tree below shows the outcomes under the possible scenarios. Clearly Chris
looks silly taking the same gift as Pat, and neither wants to be the only person not taking a gift. Given the
game tree below, determine the Nash Equilibrium (in other words, what, if anything, will Pat bring Casey
and what, if anything, will Chris bring Casey?) Explain how you found this.