THE UNIVERSITY OF NEW SOUTH WALES SCHOOL OF ECONOMICS SESSION 1, 2010 ECON1101 MICROECONOMICS I Sample FINAL EXAMINATION

1. Time Allowed - 2 Hours 2. This Paper is Worth 50% of The Total Subject Mark

3. This examination paper consists of three parts – Part A, Part B and Part C 4. Part A consists of 20 multiple choice questions each worth one (1) mark. 5. Answer all the questions in Part A on the answer sheet provided, using pencil only: • Print your student number, name and initials in the space provided and mark the appropriate boxes below your student number, name and initials. • For each question, mark the appropriate response (a), (b), (c), or (d). • Choose the most correct response to each question in Part A. There is no negative marking. 6. 7. Part B consists of one written answer question, worth FIFTEEN (15) marks. You must answer this question. Part C consists of 5 questions each worth FIFTEEN (15) marks. You must answer one (1) only of these questions.

8. Answers to questions in Part B and C must be written in ink. Pencil may be used in answers to Part B and C for drawing, sketching or graphical work only. 9. This question paper may be retained by the candidate. 10. Students may bring non-programmable hand held calculators. 11. There are twelve (12) pages in this paper

(b) The Nash equilibrium is for both firms to discount X (c) The Nash equilibrium is for Ace to discount and Bob’s to not discount.Part A . in long run equilibrium. (d) A profit maximising monopolist will always produce where marginal cost is greater than price. always use a scale of plant that minimises long run Average Costs. 6) X (b) A profit maximising monopolist always produces where Average Revenue equals (a) The Nash equilibrium is for neither firm to discount. The following pay-off matrix gives the expected monthly profits (in $’000) of each company (Ace. . 20) (16. 14) (12. Question 1 Which of the following statements is true? (a) A profit maximising monopolist will always set price and output at a level where demand is price elastic. Average Cost (c) A profit maximising monopolist will. Bob’s) under alternate strategies: BOB’S Discount Discount ACE Do Not Discount (8. (d) The Nash equilibrium is for Bob’s to discount and Ace to not discount.Multiple Choice Answer all 20 questions in Part A on the answer sheet provided as per instructions on front cover. Question 2 Assume two rival car rental companies (Ace Rentals and Bob’s Rentals) are considering whether to discount their rates as a method of increasing market share. 10) Do Not Discount (24.

5 A m a n d a ’s c a k e p r o d u c t io n p e r d a y X j k 4 3 l q 2 p m 1 n r 1 2 1 4 d u c t i o n 2 4 A m a 6 n d a 8 ’s 1 p ie 0 p r o 1 6 1 8 2 0 p e r d a y Amanda’s maximum production of pies per day is represented by point: (a) J. (d) r X .Question 3 Which of the following has the “non excludability” characteristic that defines a pure public good? (a) A local council car park (b) Suburban street lighting (c) A toll road (d) School education Question 4 A monopolist estimates that at the current price being charged for the product.4. (c) n. (b) l. and price elasticity of demand is –1. To increase profit the monopolist should: (a) Increase price and sell less (b) Increase price and sell more (c) Decrease price and sell less (d) Decrease price and sell more X Question 5 Use the following figure to answer the question. marginal revenue is less than marginal cost.

The Coase Theorem X (b) Market based instruments (c) The prisoners dilemma (d) The tragedy of the commons (a) .Question 6 The major implication of__________________ is that individuals can solve many externalities if they can buy and sell the right to commit the externality.

Consider the advantages and disadvantages of alternative criteria for setting the regulated price.Part B Answer the following Question. This question is worth 15 % of the total marks for this course. (6 marks) (c) Suppose the government seeks to regulate the behaviour of the monopolist by price regulation. This means that you must answer it. Use your diagram to explain why profit maximising behaviour by the monopolist is inefficient from society’s point of view. (6marks) . (3 marks) (b) Construct a diagram showing the average and marginal cost curves. and the demand and marginal revenue curves for a natural monopoly. Question 1 B (a) Explain what is meant by the term “natural monopoly”. This Question is Compulsory.

00 he borrowed form a credit union at an interest rate of 10% per annum. Question 1C Clearly state the nature of economic costs: that is what do economic costs represent? Distinguish between explicit and implicit costs. What is the importance of the distinction between implicit and explicit costs to the calculation of economic and accounting profit? Explain this clearly. In addition he pays insurance of $7. Calculate his: Accounting profit. Each of these questions is worth 15 % of the total marks for this course. (5 marks) Question 3C The Urban Transit Authority receives the following two pieces of expert advice: “You should cut rail fares in order to encourage greater use. His annual revenue from the school is $75.” “You cannot afford to cut fares as this will reduce your revenues” . (7 marks) Koby operates his own business (a surfing school) at a local beach where he teaches tourists how to ride surfboards.000 per year.000 per annum against injuries to his clients. his economic profit and his normal profit. 000 which he had in the bank where it received interest of 3%p.000 per annum.Part C Answer any one (1) of the Questions below. If he were not running this business he would be employed by the local council as a beach inspector and paid $45. he paid for these by using his savings of $15. His costs are advertising $3. Will he stay in business? (8 marks) Question 2C Use a normal downward sloping demand curve and an upward sloping supply curve to illustrate and explain the “deadweight loss” from the imposition of a tariff on the imported substitute for a domestically produced product.000.a the remaining $15. Raising fares will mean fewer customers and lower revenue. Where you mistakenly answer more than one of the questions below the first one you answer will be marked.000.000 per year and an annual license fee which he pays to the Council for the use of the beach of $5. giving examples of each. He provides surfboards which cost him $30. Answer only one of these questions. (10 marks) Use your diagram to compare the effect of the tariff with a policy of providing the same benefits to domestic producers by means of a taxpayer funded per unit subsidy.

However. Assume the development costs are $2b for each firm The estimated outcomes for each firm are as follows: If Microsoft and Netscape both charges $30. but also allows advertisers to better target potential customers. Giving the browser away free means more people will use it and will bring in increased advertising revenue. the other firm will sell none if they charge a price. (a) Construct the pay-off matrix showing each firm’s profit under different strategies.(a) What does each of these pieces of advice assume about the elasticity of demand for rail use? (6 marks) (b) How might an economist seek to resolve the conflict of opinion? (5marks) (c) What factors determine the elasticity of demand for rail use? (4 marks) Question 4 C Suppose Netscape and Microsoft each develop their own versions of an internet browser that is not only much more efficient and powerful for the user. If Microsoft and Netscape both gives the browser away free they share the larger market and each makes $5b in advertising revenue If one firm gives the browser away free. if one firm gives theirs away free. Since the browsers are almost perfect substitutes. (3 marks) (d) How does your analysis change if development costs are assumed to be $6b? (4 marks) . the former makes $10b in advertising revenue and the latter makes zero revenue. Each firm must decide whether to sell the browser (for say $30) or give it away free. (6 marks) (b) Assuming the situation can be modeled as a single competitive game. selling the browser will generate substantial sales revenue. they share the market and each makes $3b in sales revenue and $4b in advertising revenue. while the other tries to charge a price. is there Nash equilibrium? What is it? (2 marks) (c) Does this situation provide any incentive for collusion by the two firms? Explain your answer. thus making a loss equal to their development costs.

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