The Unive sity of the West Indies ‘SeMRSTER 1 seMesren oC] SUPYLEEMENTALISUMMER SCHOOL Examinations of December 1] / April/May t1 /July C1 2016 Originating Campus Cave ttl (3 Mona St, August Mode On Campus CI Dy Distance C] {ON 2001/ Intermediate Microeconomics 11 Course Code and Dale: May 11, 2016 ime: 9:00 — 11:00am Duration: 2 HOURS Paper No: FINAL, terials required ‘Answer booklet: Special [J Not required £1 outlator Programmable (7) Non Programmable [52] (xe pleas) Maltiple choice answer sheets womerical [ alphaietical 1200] 1100 (9 Auxiliary/Other material) - Please specify Candidates are permitted to bring the following itens to their desks: Instructions te Candidates: This paper has 5 pages and 3 questions. Answer ALL questions Write your answers in the booklet provided. ‘This paper is worth 50% of your final grade. Pull marks will only be given where ALL calculations and assumptions are clearly set out,ANSWER ALL QUESTIONS Question 1 Suppose that two identical firms produce widgets and that they are the only firms in the market. Their costs are given by Cy = 60Q, and Cy ~ 60Q,, where Q, is the output of Firm 1 and Q) the output of Fitm 2. Price is determined by the following demand curve: P=300-Q where Q=Qy + Qh. ‘A. Find the Cournot-Nash equilibrium. Calculate the profit of cach firm at this equilibrium, \ (4 marks) B,/ Suppose the two firms form a cartel to maximize joint profits. How many widgets will be produced and what is each firm’s profit, (7 marks) C. Suppose Firm 1 were the only firm in the industry. How would market output and Firm 1°s profit differs from that found in part (B) above? G marks) D. Returning to the duopoly of part (B), suppose Firm 1 abides by the agreement, but Firm 2 cheats by increasing production, How many widgets will Fim 2 produce and what will be each firm’s profit? (8 marks) E, |Provide one possible reason why cartel agreements are unstable and suggest a solution to / resolve this problem. @ marks)Question 2 A. Two neighboring homeowners have preferences over mor and loud noise (barking dogs, blaring rock music, crying children, motorized lawn care equipment, and so on). Assume that both neighbors like money, but homeowner A likes noise while homeowner B likes silenge. We can depict the consumption possibilities for the two homeowners in an Edgeworth box as follows Person B eee age __Possible endowment £! NOIS) Possible equilibrium X' Possible equilibrium X re + Possible endowment E MONEY Person A. |. Suppose there is no means by which money can be exchanged for changes in noise level. What is Person’s A most preferred allocation? Is this allocation efficient? G marks) HI. Suppose there is no means by which money can be exchanged for changes in noise level. What is Person's B most preferred allocation? Is this allocation efficient? “ @ marks) 111.Briefly explain the concept of Coase’s Theorem end its application to this problem. G marks) 1V. Suppose Person B is assigned ownership for the sound level in the neighbourhood, will there be any noise? Explain, (4 marks) (Question 2 continues on page 4)V.Suppose Person A is assigned ownership for the sound level in the neighbourhood, will there be any noise? Explain. @ marks) Vi.Compare your answers in parts I and Ii to your answers in parts IV and V. What do you conclude? G marks) B. The government of Clueless Land with « population of 3000 citizens stated that it is efficient to provide additional army supplies, because its lead advisor Dr. Oblivious stated «L7221MRS)] < MC(G)”, Do you agree or disagree with Dr. Oblivious? Explain. G marks) q\-8)< Question 3 i i An embezzior wants to hide some stolen money. An inspector is looking for the stolen money. There are two places tha the embezzler can put the money. One place is difficult to access and one is easy to access. The inspector only has time to look in one of the two places. It is costlier to hide the money in the difficult place than in the easy place and also costlier for the inspector to look in the difficult place than in the easy case. The payofis are as follows. + If the embezzler hides.the money in the difficult place and the inspector looks in the difficult place, the payoff is 0 for the embezzler and 2 for the inspector. + If the embezzler hides the money in the difficult place and the inspector looks in the easy place, the payoff is 2 for the embezzler and 1 for the inspector. + If the embezzler hides the money in the easy place and the inspector looks in the difficult place, the payoff is 3 for-the embezzler and 0 for the inspector. + If the embezzler hides the money in the easy place and the inspector looks in the easy place, the payoffs 1 for the embezzler and 3 for the inspector, A. If the embezzler has first mover advantage, use a sequential game tree to illustrate this scenario. 4 marks) B. If both the embezzler and the inspector carry out their strategies simultaneously, what is the most appropriate method to depict this? : @ marks) C. Find a Nash equilibrium in mixed strategies for this game, (8 marks) D. In Nash equilibrium: What is the expected payoff for the embezzlex? (3 marks) (Question 3 continues on page 5)B. In Nash equilibrium: What is the expected payoff for the inspector? G marks) ./ Wf the inspector believes that the embezzler randomizes in choosing his hiding place and hides the money in the hard place with probability 2/3, the inspector will maximize his, expected payoff by looking in the hard place with probability 2/3. Do you agree? Explain, G marks) END OF EXAMINATION