Econ101_W23_MT1_vA_questions

UCLA Economics 101 - Winter 2023 Professor Daniel Haanwinckel MIDTERM 1 — Version A NAME: ID: INSTRUCTIONS This exam has a total of 21 multiple-choice questions. Make sure you fill out your name, exam version, and UID in the Scantron form before you start. You should mark only one option—(a), (b), (c), (d), or (e)—in each question. All information must be filled out in No. 2 pencil. Fields/bubbled answers completed in pen will not be read by the scanners. Two of the 21 questions are “bonus.” You are not required to answer them, but they may help you. Your score will be given by the number of correct answers (including the bonus questions) divided by 19. If you have more than 19 correct answers, your score will be 100%. Good luck! SHORT QUESTIONS 1. Consider the following statements about the monopoly model seen in class: (I) The main goal of the monopolist is to maximize revenues. (II) For the monopolist, total revenue is always an increasing function of quantity. (III) The model of monopoly can only be used when marginal costs are strictly decreas- ing (i.e., the market is a natural monopoly). (a) All options are incorrect. (b) Only I is correct. (c) Only II is correct. (d) Only III is correct. (e) More than one option is correct. 2. Consider the following statements about welfare in the basic monopoly model: 1

(I) In a market that would be a monopoly if left unregulated, it may be possible to design regulation that achieves better outcomes for both consumers and the firm. (II) Monopolists exploit their market power to sell more than competitive firms would, generating deadweight losses from overconsumption. (III) Consumers would typically benefit if the government prohibited any economic activity in a market, if the alternative is a monopoly in that market. That’s because the monopolist extracts rents from consumers, and if there is no market activity, then no rents will be extracted. (a) All options are incorrect. (b) Only I is correct. (c) Only II is correct. (d) Only III is correct. (e) More than one option is correct. 3. Consider the following statements about models of price discrimination seen in class: (I) In a model with first-degree price discrimination, consumer surplus is higher than in the basic model of monopoly. That’s because there is no deadweight loss with first-degree price discrimination. (II) If a monopolist can set different prices in two different markets, and faces the same marginal cost in both markets, then we should expect prices to be lower in the market where demand is more elastic. (III) If the monopolist can produce two versions of a good and there are two types of consumers, the monopolist will always implement second-degree price discrimina- tion (that is, choose prices such that consumers self-select into buying different goods), because it always leads to higher profits compared to selling only one of the goods. (a) All options are incorrect. (b) Only I is correct. (c) Only II is correct. (d) Only III is correct. (e) More than one option is correct. 2

6. Evaluate the following statements about duopoly models (part 2). (I) Duopoly games are always solved by dominance, like the prisoner’s dilemma game. (II) In a Bertrand model where all firms have the same constant marginal cost and no fixed costs, the equilibrium quantity consumed is the same as would be predicted in a perfectly competitive model. (III) In a Cournot model where all firms have the same constant marginal cost and no fixed costs, the equilibrium quantity consumed is the same as would be predicted in a perfectly competitive model. (a) All options are incorrect. (b) Only I is correct. (c) Only II is correct. (d) Only III is correct. (e) More than one option is correct. 7. Evaluate the following statements about game theory. (I) Game Theory is most useful in economic applications where there are many agents which consider themselves small relative to their markets. (II) In every Nash equilibrium, the strategy of every player is a best response to the strategies chosen by the other players. (III) Every game has at least one dominant strategy. (a) All options are incorrect. (b) Only I is correct. (c) Only II is correct. (d) Only III is correct. (e) More than one option is correct. 8. A monopolist faces a demand curve Q ( p ) = 4 - p/ 3. The cost curve is C ( q ) = 2 + q . The monopolist decides to enter the market if they can achieve profits of at least zero. Does the monopolist enter the market, and if so, what is the equilibrium price in the market? 4

(a) The monopolist does not enter the market. (b) The monopolist enters and the price is p = 13 / 2. (c) The monopolist enters and the price is p = 11 / 6. (d) The monopolist enters and the price is p = 5 / 2. (e) The monopolist enters, but chooses a price not listed above. 9. A monopolist faces an inverse demand curve P ( q ) = 10 - 2 q . The cost curve is C ( q ) = 2 q . What is the deadweight loss in this market? (a) This market has no deadweight loss. (b) DWL = 2 (c) DWL = 3 (d) DWL = 4 (e) None of the options above. 10. A monopolist faces a demand curve Q ( p ) = 5 p - 4 . The marginal cost is constant at 3 and there is no fixed cost. What is the profit-maximizing price? (a) The monopolist would not enter this market. (b) p = 4. (c) p = 9 / 4. (d) p = 15 / 4. (e) The monopolist enters, but chooses a price not listed above. For the next two questions, consider the following game: Player 1 Player 2 L M R U 3 , 2 4 , 1 3 , 5 C 1 , 9 8 , 4 4 , 8 D 1 , 4 4 , 3 6 , 9 11. Evaluate the following statements. 5

Find the Nash equilibrium quantities for each firm. (a) q 1 = 0, q 2 = 3 (b) q 1 = q 2 = 2 (c) q 1 = q 2 = 2 . 4 (d) q 1 = 0, q 2 = 3 . 6 (e) None of the above options is correct. 14. Consider a market where five firms produce the same product and compete by choos- ing the price to charge consumers. There are no capacity constraints. Consumers purchase from the firm that charges the lowest price, p min . Aggregate demand is given by Q ( p min ) = 10 - p min / 4. Firms are ordered in marginal cost: firm 1 has marginal cost 1, firm 2 has marginal cost 2, and so forth. What is the total quantity consumed in this market, approximately? (a) Q ≈ 9 (b) Q ≈ 9 . 5 (c) Q ≈ 9 . 75 (d) There is not enough information to infer the quantity consumed. (e) None of the above options is correct. LONG QUESTION 1 A firm is a monopolist in two cities, A and B . The inverse demand curves in each city are P A ( q A ) = 14 - q A / 2 and P B ( q B ) = 14 - q B / 4. Goods are produced in the same factory with decreasing returns to scale. 15. Assume that the cost function is C ( q A , q B ) = ( q A + q B ) 2 . If the monopolist maximizes profits, what is the optimal quantity sold at city B ? (a) q * B = 2 (b) q * B = 3 (c) q * B = 4 (d) The monopolist chooses not to operate. (e) The monopolist operates, but picks a value of q B not listed above. 7

For the following two questions, assume that the monopolist’s factory is located at city A. To sell at city B, the monopolist needs to pay a shipping cost of τ per unit, where τ is a positive number. That means the total cost is now C ( q A , q B ) = ( q A + q B ) 2 + τq B , and this is not exactly the model of third-degree discrimination from class. Assume τ is small enough that it is optimal for the monopolist sell a positive quantity at city B. 16. Letting q * A and q * B denote the optimal quantities sold at each city, evaluate each the following statements: (I) MR B ( q * B ) = τ (II) MR A ( q * A ) = 0 (III) MR B ( q * B ) - MR A ( q * A ) = τ Hint: profit may be represented as R A ( q A ) + R B ( q B ) - ( q A + q B ) 2 - τq B . Take the two first order conditions and then manipulate them as needed. (a) All options are incorrect. (b) Only I is correct. (c) Only II is correct. (d) Only III is correct. (e) More than one option is correct. 17. BONUS QUESTION: If you solved for the optimal quantity sold in city A in the model with shipping costs, and compared the solution to the optimal quantity from question 15, which one would be the biggest? Hint: it’s possible to solve this question without using arithmetic. Or you can find the answer by picking a very small number for τ and solving for the optimal quantity. (a) The optimal q A is smaller in the model with shipping costs. (b) The optimal q A is bigger in the model with shipping costs. (c) The optimal q A is exactly the same in both models. (d) There exists no optimal q A in the model with shipping costs, so the comparison makes no sense. (e) There is not enough information to tell which one would be bigger. 8

(d) p = 3 (e) The profit-maximizing price is not listed above. 20. Now suppose that there is an ingredient, esthearyl telluride, which the firm may add to the goods without changing its quality or WTP at all. Doing so increases the cost from 1 to 1.1 per unit. If the MachoVerde and Elegreence brands differ in that one has esthearyl telluride but the other does not, then the new law does not apply anymore, and the company can pick different prices for each brand. Assuming the firm maximizes profits, what will they do? (a) Do not add esthearyl telluride to any formula. (b) Add esthearyl telluride to MachoVerde. (c) Add esthearyl telluride to Elegreence. (d) Add esthearyl telluride to both MachoVerde and Elegreence. (e) Option not used in this question. 21. BONUS QUESTION: Define consumer surplus as the sum of the surpluses of every consumer in the market, where the surplus is the difference between the willingness to pay and the price actually paid. In the context of the previous questions, evaluate the following statements: (I) Without the possibility of adding esthearyl telluride, the law benefits consumers, in that consumer surplus is higher in question 19 than in question 18. (II) Without the possibility of adding esthearyl telluride, the law benefits the firm, in that profits are higher in question 19 than in question 18. (III) With the possibility of adding esthearyl telluride in question 20, the law leads to no change in prices relative to question 18. It is also inefficient in the sense that resources are wasted on inputs that make no difference for the quality of the product. (a) All options are incorrect. (b) Only I is correct. (c) Only II is correct. (d) Only III is correct. (e) More than one option is correct. 10

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