ECONOMICS 53 Problem Set 7 Due before lecture on April 22

Transcription

1 Department of Economics Spring Semester 2010 University of Pacific ECONOMICS 53 Problem Set 7 Due before lecture on April 22 Part 1: Multiple Choice (30 Questions, 1 Point Each) 1. The four largest firms account for approximately 90% of U.S. beer sales. The U.S. beer industry would be best classified as a(n) A) perfectly competitive industry. B) monopolistically competitive industry. C) oligopoly. D) monopoly. 2. The oligopoly model in which firms produce exactly the same results as would exist if a monopolist controlled the entire industry is called the model. A) Cournot B) Price leadership C) Collusion D) Prisoner s Dilemma 3. Tacit collusion A) is legal under the U.S. antitrust laws. B) occurs when firms engage in formal agreements to reduce output and increase prices in their industry. C) is more likely to be successful in increasing industry profits when there are a few, similar firms in the industry. D) is more likely to effectively raise prices in the industry when demand is elastic. 4. In the Cournot model the final level of output falls between the output that would prevail if the market were and the output that would be set by a. A) competitive; monopoly B) oligopolistic; monopoly C) monopolistic; cartel D) monopolistically competitive; cartel 5) Product differentiation that makes the product better than a rivalʹs product from everyoneʹs perspective A) is known as vertical differentiation. B) is known as horizontal differentiation. C) always increases welfare. D) makes the rivalʹs product obsolete.

2 6. Which of the following is not a characteristic of monopolistic competition? A) A large number of sellers. B) Sellers offer products that are, in some way, different from their competitorsʹ products. C) There is free entry into the market. D) Firms are price takers. Figure 1 7. Refer to Figure 1. Which of the graphs shown would be consistent with a firm in a monopolistically competitive market that is earning a positive profit? A) Panel a B) Panel b C) Panel c D) Panel d 8. Refer to Figure 1. Which of the graphs shown would be consistent with a firm in a monopolistically competitive market that is doing its best but still losing money? A) Panel a B) Panel b C) Panel c D) Panel d 9. Critics of advertising argue that advertising A) highlights differences in products that might not exist. B) serves as a barrier to entry C) increases costs to consumers D) All of the above are correct.

3 10. The largest source of revenue for the federal government is the A) property tax. B) sales tax. C) corporate income tax. D) individual income tax. 11. Refer to Table Costa is a single person whose taxable income is $50,000 a year. What is his total tax due in 2002? A) $4, B) $6,426 C) $10, D) $14, Refer to Table Costa is a single person whose taxable income is $50,000 a year. What is his average tax rate in 2002? A) 19.6% B) 20.5% C) 21% D) 28% 13. Refer to Table Costa is a single person whose taxable income is $50,000 a year. What is his marginal tax rate in 2002? A) 0% B) 15% C) 28% D) 31% 14. Tax incidence refers to A) the structure of the tax B) how frequently the tax is collected C) who bears the economic burden of the tax D) the impact of the tax on price or wages

4 15. Refer to Figure 8-5. Without a tax, the equilibrium price and quantity are A) $16 and 300. B) $10 and 300. C) $10 and 600. D) $6 and Refer to Figure 8-5. Without a tax, consumer surplus in this market is A) $1,500. B) $2,400. C) $3,000. D) $3, Refer to Figure 8-5. Without a tax, producer surplus in this market is A) $1,500. B) $2,400. C) $3,000. D) $3, Refer to Figure 8-5. Without a tax, total surplus in this market is A) $3,000. B) $4,800. C) $6,000. D) $7,200.

5 19. Refer to Figure 8-5. When a tax is imposed in this market, the price buyers effectively pay is A) $10. B) $16. C) $22. D) between $10 and $ Refer to Figure 8-5. When a tax is imposed in this market, the price sellers effectively receive is A) $6. B) $10. C) $16. D) between $6 and $ Refer to Figure 8-5. When a tax is imposed in this market, consumer surplus is A) $600. B) $900. C) $1,500. D) $3, Refer to Figure 8-5. When a tax is imposed in this market, producer surplus is A) $450. B) $600. C) $900. D) $1, Refer to Figure 8-5. When a tax is placed on this good, the quantity sold A) is 600 and buyers effectively pay $10. B) is 300 and buyers effectively pay $10. C) is 600 and buyers effectively pay $16. D) is 300 and buyers effectively pay $ Refer to Figure 8-5. When the government imposes a tax in this market, tax revenue is A) $600. B) $900. C) $1,500. D) $3, Refer to Figure 8-5. The amount of the tax on each unit of the good is A) $6. B) $8. C) $10. D) $ Refer to Figure 8-5. Total surplus with the tax in place is A) $1,500. B) $3,600. C) $4,500. D) $6,000.

6 27. Refer to Figure 8-5. What happens to consumer surplus when a tax is imposed in this market? A) It falls by $3,600. B) It falls by $2,700. C) It falls by $1,800. D) It falls by $ Refer to Figure 8-5. What happens to producer surplus when a tax is imposed in this market? A) It falls by $600. B) It falls by $900. C) It falls by $1,800. D)It falls by $2, Refer to Figure 8-5. What happens to total surplus in this market when a tax is imposed? A) It increases by $1,500. B) It increases by $3,000. C) It decreases by $1,500. D) It decreases by $, Refer to Figure 8-5. The tax results in a deadweight loss that amounts to A) $600. B) $900. C) $1,500. D) $1,800.

7 Part II: Short Answers (70Points) Question 1: Cournot Model (18 Points) Suppose that the 3-D glasses industry is composed of only two firms, Toshiba and Sony. Both Toshiba and Sony have the same total cost and demand functions: TC = 30Q (total cost function for both Toshiba and Sony) P = 120 Q (demand function for both Sony and Toshiba) Where Q = number of 3-D glasses produced. Additionally, the production of 3D glasses by Toshiba depends on the number of glasses Sony produces and vice-versa. The reaction functions are as follows: qt = qs (Reaction function for Toshiba) qs = qT (Reaction function for Sony) Where qs = quantity of 3D glasses produced by Sony; qt = quantity of 3D glasses produced by Toshiba (a) If Sony produces 24 3D glasses, how many glasses will Toshiba produce? What will be the price that Toshiba will charge for its glasses? Calculate Toshiba s profits (or losses). (5 Points) (b) Graph the reaction functions for Toshiba and Sony on the same graph. Put the quantity of glasses produced by Toshiba on the y-axis, and the quantity of glasses produced by Sony on the x-axis. (5 Points) (c) Solve for the best response equilibrium. At the best response equilibrium, how many 3D glasses will Toshiba produce? At the best response equilibrium, how many 3D glasses will Sony produce? What will be the price that each firm will charge for their glasses? What will be the profits or loss each firm will realize? (8 Points)

8 Question 2: Anti-Trust Policy: Herfindahl-Hirschman Index (9 Points) Suppose that the airline industry contains only five firms. The table below shows the market share of each firm in the market. Percentage Share of Industry: United Airlines American Airlines Southwest Delta Jet Blue (a) Calculate the Herfindahl-Hirschman index for this industry. (3 Points) (b) Suppose that Southwest and JetBlue want to merge into one combined airline called SouthBlue. Will the Justice Department allow this merger to take place? Show your work to justify your answer. (3 Points) (c) What if Southwest wanted to merge with Delta instead of JetBlue. Will the Justice Department allow this merger to take place? Show your work to justify your answer. (3 Points)

9 Question 3: Taxes (21 Points) The market for cases of Johnnie Walker Scotch Whiskey is represented by the following demand and supply curves. Q d = 80 - P (demand curve) Q s = 0.5P 10 (supply curve) (a) Graph the demand and supply curves together in one graph. In your graph be sure to label the axes and the curves. Clearly indicate where the demand curve crosses the axes (find the X and Y intercepts). (4 Points) Using algebra calculate the equilibrium price and quantity in this market. (4 Points) (b) Calculate the consumer surplus, producer surplus and total surplus of this market. (3 Points) (c) A new political party called the Temperance Party takes control of the state legislature. The main goal of the Temperance Party is to discourage alcoholic consumption. Towards that end, they passed a law imposing a $6 tax per case consumed of Johnnie Walker s Scotch Whiskey directly on consumers. Calculate the new demand curve that would result from this tax. Draw this demand curve in your graph from Part (a). (Hint: The price consumers ultimately will pay will be different from the market price of the whiskey). (4 Points)

10 (d) Using algebra, calculate the new equilibrium price and quantity after the tax has been imposed. (2 Points) (e) Calculate the consumer surplus, producer surplus, government revenue, and total surplus associated with this tax. (4 Points) (f) Calculate the deadweight loss to society from this tax. (4 Points) Question 4: Game Theory (14 Points) The United States is considering imposing trade sanctions on China. The imposition of trade sanctions by the United States would likely trigger a retaliatory measure by China who would impose its own trade sanctions on the United States. The potential economic consequences of trade sanctions are outlined below: If the United States imposes trade sanctions and China does not impose trade sanctions then the U.S. trade balance will be $140 billion, while China s trade balance will be $5 billion. If the United States imposes trade sanctions and China also imposes trade sanctions, then the U.S. trade balance will be $65 billion, while China s trade balance will be $75 billion. If the United States does not impose trade sanctions but China imposes trade sanctions then the U.S. trade balance will be $35 billion, while China s trade balance will be $285 billion.

11 If the United States and China both decide not to impose trade sanctions, then the U.S. trade balance will be $130 billion, while China s trade balance will be $275 billion. (a) Represent the above situation above in a payoff-game matrix. (5 Points) (b) Does the United States have a dominant strategy? Explain (3 Points) (c) Does China have a dominant strategy? Explain (3 Points) (d) Find the Nash Equilibrium of this situation. (3 Points)

12 Question 5: Graphical Analysis of Monopolistically Competitive Market (8 Points) The firm below sells its output in a monopolistically competitive market. (a) Show the firmʹs profit-maximizing level of output and price. Is the firm earning a profit or a loss? Show your answer on the graph. (3 Points) (b) What will happen in the long run to this monopolistically competitive firm? Explain in words and show graphically in the figure above. (5 Points)