BUSS 230 Final, Spring 2008

BUSS 230 - Final Exam : January 22, 2008 I. Multiple Choice 1 D 5 A 9 C 2 A 6 B 10 C 3 C 7 B 11 D 4 B 8 A 12 D II. True or False 1. 1 Before inflection point, TVC will be increasing at a decreasing rate and hence MC will be falling. Beyond inflection point, TVC will be increasing at an increasing rate and hence MC will be rising. At inflection point, MC has ceased to decrease and is about to increase. Hence MC is at its minimum. 2. 0 With P = MC and P > AVC, firm is producing its optimum output and will not change output. 3. 0 Theory of Contestable Markets postulates that under costless entry and exit, a market with even a single firm will behave like a perfectly competitive market. 4. 1 Searching for the NASH EQUILIBRIUM is what occurs when no dominant or dominated strategy can be identified. Existence of a dominant strategy identifies a NASH Equilibrium. 5. 0 The collusion in a Centrally-Administered Cartel is open and is neither tacit nor implicit. 6. 1 Export subsidies are a means of lowering the prices of goods sold outside the domestic market, compared with the prices of goods sold in the domestic market. 7. 1 When goods are complements in consumption, then increased sales of A will cause sales of B to increase also. Thus, the change in total revenue from B will be positive when sales of A increase. 8. 0 At the optimal output, if the MR from one of the by-products is < 0, some output will be sold but the amount sold of that by-product will stop at where its MR = 0. III.a III.b III.c III.d for that firm's output and cause its Q and P to fall. In the long-run, firms in monopolistically competitive markets will earn zero economic profits. III.e III.f IV.a IV.b P = 22.5 TR = 25*22.5 = 562.5 505 π = 57.5 P=23 TR = 20*23 = 460 TC = 110+5*20+0.4*20^2= 370 π = 90 IV.c Demand --> P = 25 - Q/20 MR = 25 - Q/10 MR = 16 - Q, MC = Q² - 9 Q - 4. @ MR = MC, Q = 10, hence P = 11 TR = 11*10; TC = 43.33; π = ~ 67. Optimum Q will not change since FC do not affect MC. However π will fall by 50. Profits will attract new entrants into the broad market. This will reduce DEMAND @ P = MC, Q will be 10, TR = 60 and TC = 43.33. Hence π will be ~ 17 Surplus = area under demand and above P = 6. Its value = (16-6)*10/2 = 50 QA = 250 - 10 P; QB = 250 - 10 P MRA = 25 - Q/5; MRB = 25 - Q/5 MCA = 10 + 0.4 Q; MCB = 5 + 0.8 Q Market A: 25 - Q/5 = 10 + 0.4 Q; 15 = 0.6 Q --> Q = 25 TC = 130+10*25+0.2*25²= Market B: 25 - Q/5 = 5 + 0.8 Q; 20 = Q --> Q = 20 Q = 45.4545 V.a V.b Firm 1 will adopt its dominant startegy while Firm 2 will select the strategy that will result in the higher payoff corresponding to Firm 1's expected strategy. Both firms V.c PAYOFFS Firm 1 Firm2 Advertise 4 2 Firm 2 Advertise Do not Advertise 7 -2 Firm1 Do not Advertise Advertise 2 4 Firm 2 Do not Advertise 6 5 V.d For Firm 1, the payoffs corresponding to advertising (4,7) dominate the payoffs for not advertising (2,6). Firm 1 therefore has a dominant strategy of advertising and will adopt it. Firm 2 cannot isentify a dominant strategy but knows that Firm1 will adopt its dominant strategy of advertising and, thus, also adopts a strategy of advertising. VI a. Writing the inverse demand functions: Pb = 240 - Qb/10 and Pv = 200 - Qv/8. Therefore MRb = 240 - Qb/5 and MRv = 200 - Qv/4. Writing the inverse MR functions: Qb = 1200 - 5MRb and Qv = 800 - 4MRv. The sum of the MRs therefore is: Q = 2000 - 9MR MR = 2000/9 - Q/9. At Q=1325, MR = 75 With MRb = 75, Qb = 1200 - 5 x 75 (from inverse MRb equation) Qb = 825 With MRv = 75, Qv = 800 - 4X 75 (from inverse MRv equation) Qv = 500 V b. Setting the sum of MRs equal to MC: 2000/9 - Q/9 = 45 + 5Q/100 and (2000 - 9*45)/9 = 100 Q/900 + 45 Q/900 Profit maximizing Q is: 1100 At Q = 1100, MR = 100 = MRb = MRv Qb = 700 Qv = 400 V c. The respective prices are obtained from the respective demand functions. Pb = 240 -700/10 Pb = 170 Pv = 200 - 400/8 Pv = 150 Vd. Higher price is charged in market with less elastic demand. ∑MC = MCA + MCB --> (-25 + 2.5 MCA) + ( -6.25 + 1.25 MCB) = -31.25 + 3.75 MC ∑MC = 31.25/3.75 + Q/3.75. Optimum QT where: 31.25/3.75 + Q/3.75 = 25 - Q/10 Only Firm 1 has a dominant strategy, and that is to ADVERTISE will adopt strategies of Advertising.