Economics Questions In Tutorial Library

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TITLE: Economics Questions




Question 1: Price Discrimination


Part A: The local zoo has hired you to assist them in setting admission prices. The zoo’s managers recognize that there are two distinct demand curves for zoo admission. One demand curve applies to those ages 12 to 64, while the other is for children and senior citizens. The two demand and marginal revenue curves are:


                                      PA = 9.6 – 0.08QA

                                      MRA = 9.6 – 0.16QA


                                      PCS = 4 – 0.05QCS

                                      MRCS = 4 – 0.10QCS


where PA = adult price, PCS = children’s/senior citizen’s price, QA = daily quantity of adults, and QCS = daily quantity of children and senior citizens. Crowding is not a problem at the zoo, so that the managers consider marginal cost to be zero. If the zoo decides to price discriminate, what should the price and quantity be in each market? Calculate the firm’s total revenue in each sub-market.



Part B: Suppose consumers are identical. Will an optimal two-part tariff be less efficient (create more deadweight loss) than perfect competition. Illustrate your answer.



Part C: Numerous restaurants offer discounts to customers who ear dinner between 4 – 6 p.m. (often called “early bird” specials). Can you explain why this is a form of third-degree price discrimination and how the market is being segmented?




Question 2: Monopolistic Competition/Oligopoly


Part A: Suppose that the market demand for mountain spring water is given as P = 1200 – Q, where MR = 1200 – 2Q. Mountain spring water can be produced at no cost.


a.       What is the profit maximizing level of output and price of a monopolist?



b.  What level of output would be produced by each firm in a Cournot duopoly in the long run if the firms are identical (symmetric)? What will the price be? Note MR1 = 1200 – 2Q1 – Q2; MR2 = 1200 – 2Q2 – Q1.



c.   What will be the level of output and price in the long run if this industry were perfectly competitive?



Part B: At its current output level of 10, a monopolistically competitive firm has MR = 4, MC = 4, AC = 6, and P = 8. Is this market in long-run equilibrium? If not, describe the adjustment process necessary to achieve long-run equilibrium?



Part C: The two leading U.S. manufacturers of high performance radial tires must set their advertising strategy for the coming year. Each firm has two strategies available: maintain current advertising or increase advertising by 15%. The strategies available to the two firms, G and B, are presented in the payoff matrix below. The entries in the individual cells are profits measured in millions of dollars. Firm G's outcome is listed before the comma, Firm B's after the comma.




Firm B



Increase Adv.

Maintain Adv.

Firm G

Increase Adv.

27, 27

50, 12


Maintain Adv.

12, 50

45, 45


Which model is best suited for analyzing this decision? Why? (Remember it is illegal to collude in the United States). Carefully explain the strategy that should be used by each firm.



Question 3: General Equilibrium


Part A: Consider a potential, voluntary exchange between two people. Assume that both people have complete information about each other's preferences and that there are no transaction costs. Consumers A and B have between them 9 units of X and 15 units of Y. Initially, A has 6 of X and 10 of Y, and B has 3 of X and 5 of Y. Consumer A's marginal rate of substitution of X for Y is 2 and B's marginal rate of substitution of X for Y is 1/3. Is there room for a mutually beneficial, voluntary exchange? Draw an Edgeworth box. Determine which consumer would trade for more X and which consumer would trade for more Y. If trade takes place, can you explain the terms of trade? (the range of prices between which trade will take place)



Part B: What is the necessary condition for cost minimization for a firm that buys inputs in competitive factor markets? Explain why a competitive equilibrium in factor markets is an efficient allocation in the production Edgeworth box. If the amount of productive resources available for use in an economy were to increase, what would happen to the production possibilities frontier?




Question 4: Externalities



Part A: The market for paper in a particular region has the following supply and demand curves: QD = 160,000 - 2,000P; QS = 40,000 + 2,000P, where Q is measured in hundred-pound lots, and P is price per hundred-pound lot. There is currently no attempt to regulate the dumping of effluent into streams and rivers by the paper mills. As a result, dumping is widespread. The marginal external cost associated with the paper production is given by the expression: MEC = 0.0002Q.


a.     Calculate the competitive price and output, assuming that no attempt is made to monitor or regulate the dumping of effluent.



b.     Determine the socially optimal levels for price and output. If your answers in (a) and (b) are different, explain the source of the difference.



c.      Sketch a diagram showing the costs or benefits to society of allowing the market to operate in an unregulated fashion.






Part B: “There is no need for government intervention when positive externalities are present because no one is being harmed”. Discuss the validity of this statement.

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