7/23/2019 Week 13 Extended Answers

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PASS Week 13 Answers

(1) B.(2) E. Due to rightward shift in supply and rightward shift in demand, there will be a price decrease

but we cannot determine what will happen to equilibrium quantity.(3) A. The slope = ∞ so   1

slope = 0 (sort of). More precisely, as the slope goes toward  ∞ ,   1

slope  goes

toward 0.(4) A. Certainly A is true, we must just determine why B or C are not. The reason is that point

elasticity (which is really the only correct one, as the other formula   ϵ  =   △Q△P 

  is just an approx-

imation) is not constant. If you calculated elasticity over Bob’s entire demand curve, it wouldsometimes be elastic and sometimes inelastic. Therefore B and C are incorrect as Bob’s demandis not  only  elastic or ineelastic.

(5) E. On the interval ’a’, demand is elastic. On the interval ’b’, demand is inelastic. To see Dis correct, pick a point in the centre of B (ie   Q   = 125, P   = 25) at which total expenditure= 125 ∗ 25 = 3125.Whereas at   Q   = 100, P   = 50 we have total expenditure = 5000.  Hence wesee that as we move rightward along B, total expenditure decreases. Similarly C is also true(maximum expenditure is where we have unit elasticity - ie at  Q = 100, P  = 50).

(6) B.

(7) B.(8) D. In the long run, in a monopolistic competitive industry,  P > MC . This follows from the factthat in a monopolistic competitive industry, each firm faces a downward sloping demand curve,and hence their  MR  curve is similar to a monopolists curve. For this reason, C is wrong.

(9) D.(10) A. Given that  T C  = 64 + 2q + 4q 2,  we see that fixed costs are 64 and variable costs are 2q + 4q 2.

To decide shutdown in the short run, we find the profit maximising quantity (by setting  MR =P   =  M C ) and seeing that the profit generated at that quantity is less than the fixed cost. Weget that   π  =  −15   >  −65 =   F C   so the firm would rather produce and lost $15 than shutdownand lose $65. Simply because profit is negative, the firm will exit the industry in the long run.

(11) C.(12) D. In a monopolistic competitive industry,   P > MC  . This follows from the fact that in a

monopolistic competitive industry, each firm faces a downward sloping demand curve, and hence

their   MR  curve is similar to a monopolists curve (same p-intercept as demand but with twicethe slope of demand).

(13) E. In a competitive market, price is determined solely by MC and ouput by MC and MR. Whenfixed costs change, MC or MR does not change. For this reason, a decrease in each firm’s FCwould not effect price or output and hence, would not effect profit.

(14) C. Use backward induction. That is, decide what would happen if BHP played S, or M, or L (if Rio was maximising its own payout) and then BHP will choose the best of those three optionsgiven they can predict what Rio will do. For example, if BHP played S, then Rio would play M(since Rio’s payout of playing M of 15 is better than the other two options). Do this for the othertwo branches.

(15) E. If  AV C  = 5 then  M C  = 5.  Find MR, set equal to MC and the rest is straightforward.(16) C. A is clearly wrong. B is wrong since there is no deadweight loss generated by a perfect price

discriminating monopolist. D is wrong since a perfect price discriminating monopolist has a MRcurve that is exactly identical to D curve.(17) A. Draw the curves and its clear.(18) D. Bottom left and top right boxes are NE.(19) A. Do the same as Q14 (ie backward induction).(20) A. Trick question of sorts. Since the quota is larger than the amount the market would ever want

to import, it is effectively useless. So nothing changes from the free trade situation and there isno deadweight loss. B and C would be correct in the case that the quota is actually filled (ie if the quota was actually limiting the amount imported).

(21) B. The 4th coffee has  MB = $1.25 < p = $2 so Zacharias will not purchase it.

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