1.

You are participating in an auction in which risk neutral participants hold independent private valuations of the
item being sold. These valuations are distributed uniformly from a low of $10,000 to a high of $160,000. There
are 7 bidders in the auction (including you). You value the object at $150,000. If this is a First Price Sealed Bid
auction your optimal bid equals:
a) $130,000 b) $135,000 c) 140,000 d)145,000 e) $150,000

2. You are participating in an auction in which risk neutral participants hold independent private valuations of the
item being sold. These valuations are distributed uniformly from a low of $10,000 to a high of $160,000. There
are 7 bidders in the auction (including you). You value the object at $150,000. If this is a Dutch auction your
maximum expected benefit from participating in the auction equals:
a) $1,356.55 b) $2,484.22 c) $4,086.33 d) $5,242.88 e) $6,586.44

$ 130,000−$ 10,000 6 (
EGain= ( $ 160,000−$ 10,000 ) $ 150,000−$ 130,000 ) =5,242.88

3. You are participating in an auction in which risk neutral participants hold independent private valuations of the
item being sold. These valuations are distributed uniformly from a low of $10,000 to a high of $160,000. There
are 7 bidders in the auction (including you). You value the object at $150,000. If this is a Second Price Sealed
Bid auction your optimal bid equals:
a) $130,000 b) $135,000 c) 140,000 d)145,000 e) $150,000

4. You are looking to purchase an item which is available in 10 stores. You know the item is offered a low price of
$495 in three of these stores. In the remaining seven stores the item sells at a higher price of $595. The first
store you visit is asking for the higher price. You will leave without buying the item, and move on to another
store searching for the lower price, if the marginal cost of doing so is not greater than:
a) $30.00 b) $33.33 c) $40.00 d) $66.67 e) $99.99

5. In an industry with 12 firms that have equal sales the HHI equals _______. If two of these firms merge, the
change in the HHI will equal _______.
a) 833.33; 164.42 b) 866.67; 138.89 c) 866.67; 164.42 d) 833.33; 138.89
12
1 2 1 1 1
HHI =10,000 × ∑
i=1
( )
12
=10,000 ×
12 ( )
=833.33 ∆ HHI =2
12 12 ( )( )
10,000=138.89

6. You are managing a profit maximizing firm, charging the same price in both markets. In Market A, the price
elasticity of demand of consumers in that market is -2.5. In market B, the price elasticity of demand equals -3.0.
From this information you can determine that you should ______ the quantity you sell in market A and ______
the price you charge in Market B if you can practice 3 rd degree price discrimination.
a) increase; increase b) increase; decrease c) decrease; increase d) decrease; decrease
e) None of the above are correct.
1 3 2 1
[
MR ( Q A )= 1+
−2.5
P=] () () [
5
P<
3
P= 1+
−3
P=MR (Q B ) ]

BLUE Final Exam Page 1 of 8 Econ 301 – Fall 2019

7. In a perfectly competitive market for an inferior good, a rise in the product price and in the quantity sold could
be caused by
a) an increase in the price of an intermediate good used in production.
b) improved technology in production.
c) a rise in household income.
d) a rise in the price of a substitute good.
e) a rise in the expected future price of a complementary good.

Your firm faces random future demand, but you must commit to a production decision today given the time it
takes to produce a finished product. Your costs of production for any amount of output Q to produce to take to market
are C(Q) = 175,000 + 20Q + (1/4)Q 2, with dC(Q)/dQ = 20 + (1/2)Q. You expect demand to be high, Q = 1000 – P, with
probability 0.8. Demand will be low, Q = 800 – P, with probability 0.2. You manage a profit maximizing firm.

8. Given your profit maximizing production level, the maximum price you will be able to charge if demand is high
equals:
a) 424 b) 584 c) 624 d) 776 e) 824

9. If demand is low, your profit will equal:

a) – 58,440 b) – 24,660 c) 0 d) 16,760 e) 42,820

10. Your maximum expected profit equals:

a) - 800 b) 0 c) 1,720 d) 4,220 e) 5,400

11. The standard deviation of your profit, a measure of risk for shareholders in your firm, equals:
a) 15,840 b) 21,660 c) 28,820 d) 30,080 e) 34,060

BLUE Final Exam Page 2 of 8 Econ 301 – Fall 2019

 Louise faces an uncertain future. Her wealth will equal $810,000 if she has no accident in the coming year. But
she has a probability of 0.01 percent of having an accident which will impose dollar damages on her of $800,000. Louise
is risk averse, with utility of wealth U(W) = 10W 3/4.

12. Assuming zero administrative costs, the minimum insurance premium a company would charge Louise to insure
her wealth equals:
a) $80.00 b) $100.00 c) $120.00 d) $200.00 e) None of the above are correct.

13. Assuming zero administrative costs, the maximum profit an insurance company could expect to earn from
insuring Louise’s wealth equals:
a) $0.00 b) $24.00 c) $48.00 d) $72.00 e) None of the above are correct.

14. Which of the following statements is not true?

a) The Dutch and First-price, sealed-bid, auctions are strategically equivalent.
b) A mineral rights auction is a common value auction.
c) An auctioneer is always indifferent between different kinds of auctions, given revenue equivalence.
d) An English auction yields higher expected revenues than a second-price sealed bid auction when
bidders are risk averse.

15. Demand for inferior goods will _______ during economic recessions.
a) rise b) remain unchanged c) fall d) disappear

16. A surplus of or excess supply of a product in a competitive market will be created by a price ______ set _____
the equilibrium price.
a) floor; below b) floor; above c) ceiling; above d) ceiling; below
e) None of the above are correct.

17. We can reduce, but not eliminate the ________ problem confronting stockholders by increasing the percentage
of managers’ compensation tied to profits of the firm.
a) hold up c) adverse selection
b) principal - agent d) retained earnings

An employee works for a manager who can choose to monitor his efforts on the job or not to monitor. The
manager realizes that he can choose to work or shirk while on the job. If she is monitoring and he is working, her payoff
is 40 and his payoff is 20. If she is monitoring and he is shirking, her payoff is 120 and his payoff is -40. If she chooses
BLUE Final Exam Page 3 of 8 Econ 301 – Fall 2019
not to monitor and he is working, her payoff is 100 and his payoff is 0. If she is not monitoring and he is shirking, her
payoff is 0 and his payoff is 60. This is a simultaneous game: both manager and employee must choose their strategies
without knowledge of what the other is going to do.

18. If both manager and employee adopt a secure strategy, the manager’s payoff will be ______ and the employee’s
payoff will be _______.
a) 40; 20 b) 120; -40 c) 100; 0 d) 0; 60

19. If the employee adopts a mixed strategy, for which he decides to randomly work with probability ______, the
manager will be indifferent between choosing to monitor versus not monitoring.
a) 1/4 b) 1/3 c) 1/2 d) 2/3 e) None of the above are correct.

20. Suppose the manager also adopts a mixed strategy, randomly monitoring so that the employee is indifferent
between working versus shirking. With these two mixed strategies in place the probability that the worker will
be caught shirking by a monitoring manager equals ______.
a) 1/12 b) 1/6 c) 2/9 d) 1/4 e) None of the above are correct.

21. For a given profit maximizing firm in an industry, demand is Q = 800 – (1/5)P. The firm’s costs of production
C(Q) = 350,000 + 5Q2, with dC(Q) = 10Q. If this firm cannot price discriminate it will produce and sell ______
units of output.
BLUE Final Exam Page 4 of 8 Econ 301 – Fall 2019
 a) 100 b) 200 c) 400 d) 800 e) None of the above are correct.

22. For a given profit maximizing firm in an industry, demand is Q = 800 – (1/5)P. The firm’s costs of production
C(Q) = 350,000 + 5Q2, with dC(Q) = 10Q. At this firm’s profit maximizing level of output, the Lerner index equals:
a) 3/4 b) 2/3 c) 1/2 d) 1/3 e) None of the above are correct.

23. For a given profit maximizing firm in an industry, demand is Q = 800 – (1/5)P. The firm’s costs of production
C(Q) = 350,000 + 5Q2, with dC(Q) = 10Q. If the price elasticity of demand for the total industry’s product, E T, is
- 0.6, and this is a representative firm, we can conclude that the Rothschild index equals:
a) 1.0 b) 0.75 c) 0.33 d) 0.2 e) None of the above are correct.

Firm A and B produce products which consumers consider to be substitutes. In an effort to increase market
share, both firms advertise. Each must choose a HIGH or LOW profile advertising strategy. Payoffs to each firm given
their joint strategies are shown below:

Firm B

Low High

Low (4, 4) (0, 24)

Firm A
High (14, 0) (3, 1)

24. A Nash Equilibrium for this game, an “Advertising Dilemma,” occurs with joint strategies (Firm A, Firm B):
a) (Low,Low) b) (Low,High) c) (High,Low) d) (High,High)
e) None of the above are correct.

25. If each firm adopts a trigger strategy cooperation by both firms in maintaining low advertising strategies is only
possible if Firm A’s rate of time discount is less than ___ percent and Firm B’s rate of time discount is less than
___ percent.
a) 10; 15 b) 15; 10 c) 10; 5 d) 5; 10 e) None of the above are correct.

Consider the Short Run Cost Curves shown below:

MC
BLUE Final Exam Page 5 of 8 Econ 301 – Fall 2019

110
 50

1500 2100 Q

This firm uses only capital and labor as inputs, inputs it acquires in competitive markets. Capital is fixed.

26. The rental rate of capital is $1,200/unit of capital. This firm is employing _____ units of capital.
a) 75 b) 100 c) 125 d) 150 e) None of the above are correct.

27. If the wage the firm is paying is $600/worker, the firm is employing ______ workers when it produces 2100 units
of output.
a) 150 b) 200 c) 250 d) 300 e) None of the above are correct.

28. At output level 2100, the marginal product of capital equals 12. Can this firm decrease its costs in the long run
by adjusting its employment of capital and labor?
a) The firm can reduce per-unit cost of production in the long run by employing more labor and less capital.
b) This firm can reduce per-unit cost of production in the long run by employing more capital and less labor.
c) No, this firm is minimizing per-unit cost of production with its current levels of employment.
d) This question cannot be answered without further information. It is not possible to determine the marginal
rate of technical substitution of labor for capital from the data provided here.

29. Current profits for a firm equal $800,000. The firm has not paid dividends. If profits are expected to grow at a
rate of 3 percent per year into an indefinite future, and the annual interest rate used to discount future profits is
8 percent, the market value of this firm equals:
a) 14,880,000 b) 15,680,000 c) 16,480,000 d) $17,280,000
e) None of the above are correct.
1+ 0.08
PV =800,000 ( 0.08−0.03 )=17,280,000
30. Consider the game shown in extensive form below. Payoffs are shown as (Player 1’s payoff, Player 2’s payoff).
We would expect the sequence of moves: Player 1 opens with _____, Player 2 follows with _____, Player 1
follows with _____ and Player 2 finishes with _____.
a) A;C;E;G b) A;D;F;G c) B;C;E;H d) B;C;F;G e) B;C;F;H

BLUE Final Exam Page 6 of 8 Econ 301 – Fall 2019

 G (100,105)

2 H
E (90,95)

G (65, 110)
1 F
C 2 H
(75, 85)
2 (65,125)
G
D 2 H
E
A (50,115)
1 G (75,95)
F
2 H
(95,60)
1 (110,75)
G
2 H
E
B (95, 90)
1 G (90,110)
C F
2 H
(135,105)
2
(100, 75)
G
D
2 H
E (90, 85)
1 (85,125)
F G
2
H (125,115)

31. In regression analysis, the ________ statistic reveals the fraction of variation in the “left hand side” variable that
is explained by variation in the “right hand side” variables.
a) R2 b) F c) t d) V

32. If a firm is producing in two plants, Plant A and Plant B, and selling in one market it will maximize profits where:
a) MR(QA) = MR(QB) = MC(QA+QB)
b) MR(QA+QB) = MC(QA) = MC(QB)
c) MR(QA) = MC(QA) and MR(QB) = MC(QB)
d) MR(QA+QB) = MC(QA+QB)
e) None of the above are correct.

33. In the region of a demand curve where marginal revenue is negative it is true that:
BLUE Final Exam Page 7 of 8 Econ 301 – Fall 2019
 a) EQ,P > 0 b) |EQ,P| > 1 c) |EQ,P| = 1 d) |EQ,P| < 1 e) None of the above are correct.

34. A coordination problem in a simultaneous game usually occurs if there is

a) no Nash equilibrium in the game. c) a unique secure strategy for each player.
b) a unique, but undesirable Nash equilibrium. d) more than one Nash equilibrium.

35. Insurance companies confront a(n) __________ problem before insurance contracts are written. After the
contract is in place they confront a(n) __________ problem. Both of these problems raise expected costs of
insuring clients.
a) moral hazard; adverse selection c) adverse selection; moral hazard
b) principal agent; monitoring d) monitoring; principal agent

BLUE Final Exam Page 8 of 8 Econ 301 – Fall 2019