Exam #3 Fall 2014

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T

T

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.

F Government policy should seek to eliminate all pollution.

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

.

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

Q

0

TR

___

MR

xxx

MC

xxx

37

33

29

25

1

2

3

4

___

___

___

___

___

___

___

___

16

10

14

16

21

17

13

5

6

7

___

___

___

___

___

___

24

32

43 a. b.

Fill in the missing data for TR and MR.

ATC

xxx

36

23

20

19

20

22

25

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

MR

Demand

Output

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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