Exam #3 Fall 2014

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Econ 215, Principles of Microeconomics
Exam #3, Fall 2014
Dr. Stonebraker
Name _______________________________
1. (24%) True-False. Explain every answer. The explanation is more important than the true-false choice.
T
F
If competitive firms form a cartel, both price and quantity will rise.
T
F
T
F
A perfectly competitive firm will operate with technical efficiency in the long run.
T
F
Long-run profits for firms in monopolistic competition usually are higher than long-run profits
for firms in oligopoly.
Government policy should seek to eliminate all pollution.
2. (3%) What is a Nash equilibrium?
3. (4%) What are the characteristics of monopolistic competition?
4. (7%) What is the tragedy of the commons? Explain.
5. (12%) Using the below data for a monopoly:
P
$41
37
33
29
25
21
17
13
Q
0
1
2
3
4
5
6
7
TR
___
___
___
___
___
___
___
___
MR
xxx
___
___
___
___
___
___
___
MC
xxx
16
10
14
16
24
32
43
ATC
xxx
36
23
20
19
20
22
25
a.
b.
Fill in the missing data for TR and MR.
What is the profit-maximizing combination of price and quantity for the monopoly? Explain
your answer.
c.
What profit or loss will the monopoly earn at the profit-maximizing price and quantity? Show
your calculations.
6. (3%) What is a natural monopoly?
7. (5%) Restaurants typically charge much higher prices for dinner than for lunch, despite the fact that the
cost of serving these meals is about the same. Explain why.
8. (10%) Define the concept of a dominant strategy. Use the concept to explain why oligopoly firms
might engage in wasteful and destructive advertising arms races.
9. (12%) Given the following graph for a monopoly firm:
a. Show the profit-maximizing price and output for the firm and label them P1 and Q1.
b. Show the total profit or loss that the firm will earn at this P1, Q1 combination.
c. Show the output that will maximize total revenue and label it Q2.
Price
MC
ATC
Demand
Output
MR
10. (8%) Explain the principal-agent problem and how it affects the efficiency with which managers of
monopolies operate.
11. (12%) Clearly explain why markets will not produce the allocatively efficient amounts of a good when
external benefits are present. Draw an appropriate graph to illustrate the deadweight welfare loss
caused by this inefficiency and explain clearly.
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