SECTION C: FREE RESPONSE QUESTIONS. TOTAL MARKS: 40.ANSWER TWO OF THE FOLL

05 Jun SECTION C: FREE RESPONSE QUESTIONS. TOTAL MARKS: 40.ANSWER TWO OF THE FOLL

Question
SECTION C: FREE RESPONSE QUESTIONS. TOTAL MARKS: 40.ANSWER TWO OF THE FOLLOWING THREE QUESTIONS:

INSTRUCTION: Take a few minutes to plan and outline each answer. In answering the questions, you should emphasize the line of reasoning that generated your results; it is not enough to list the results of your analysis. Include diagrams, if useful, in explaining your answers. All diagrams should be correctly labeled.

Question C1 (20 marks): C1.1

1.1 Use a graph to demonstrate the circumstances that would prevail in a perfectly competitive market where firms are experiencing economic losses. (4 marks)

1.2 Identify costs, revenue, and the economic losses on your graph. (3 marks)

1.3 Using your graph, determine whether this firm will shut down in the short run or choose to remain in the market. Explain your answer. (3 marks)

C1.2.

– Complete the following total for marginal cost. (3 marks)

– How many units of output should this monopoly firm produce in order to maximize its profits? (3 marks)

– What is the market price of the product, and what is the maximum profit? (4 marks)

Quantity Marginal Total Marginal Sold Price Revenue Cost Cost

0 20 – 5

1 19 19 7

2 18 17 10

3 17 15 14

4 16 13 19

5 15 11 25

6 14 9 32

7 13 7 40

8 12 5 49

9 11 3 59 10 10 1 70

Question C2. 20 marks.The graph below shows the demand curve (D), marginal revenue curve (MR), marginal cost curve (MC), average total cost curve (ATC), and long-run average total cost curve (LRATC) for a monopolist.

Using the numbers given in the graph, identify each of the following for the profit-maximizing monopolist.

(a) The quantity produced

(b) The price

(c) The allocatively efficient quantity

(6 marks)

(d) At the profit-maximizing quantity from part (a) is the monopolist experiencing economies of scale? Explain (2 marks)

Now assume that the monopolist produces 10 units. Using the numbers given in the graph,calculate each of the following. Show your work.

(e) The monopolist’s economic profit

(f) The consumer surplus

(g) The deadweight loss

(6 marks)

(h) At what quantity is demand unit elastic?

(2 marks)

Suppose the monopolist perfectly price discriminates and chooses the quantity that maximizes profit. Determine the dollar value of each of the following.

(i) The monopolist’s profit

(j) The consumer surplus

(4 marks)

Question C3 (20 MARKS)

Question C3A: Prisoner’s dilemma

Question a1: What is prisoner’s dilemma? Explain the idea/dilemma in terms of the following story ( 4 marks):

Bonnie and Clyde have been captured. The police have enough evidence to convict them on a weapons charge (sentence = 1 year), but suspect that they have been involved in a bank robbery. Because they lack hard evidence in the crime, they need at least one of them to confess.

The police lock the two in separate rooms and offer each of them a deal: “We can lock you up for 1 year. However, if you confess to the bank robbery and implicate your partner, we will give you immunity. You will go free and your partner will get 20 years in jail. If you both confess, we won’t need your testimony and will avoid the cost of a trial, so you will both get 8 years.”

Questions:

a2. What is Bonnie’s dominant strategy and why? Explain (2 marks) a3. What is Clyde’s dominant strategy and why? Explain (2marks)

a4. Would both the better off if they had remained silent? Explain. What leads them to break silence leading to an inferior outcome? (3 marks)

Question C3B. Oligopolies as a Prisoners’ Dilemma

Example: Jack and Jill are trying to keep the production of water low to keep the price high. After reaching an agreement, each individual must decide whether to follow the agreement.

Suppose that they are faced with the following decision:

Figure 2

Jack’s

Decision

40L

30L

Jill’s

Decision

40L

$1600 profit for Jack

$1600 profit for Jill

$1500 profit for Jack

$2000 profit for Jill

30L

$2000 profit for Jack

$1500 profit for Jill

$1800 profit for Jack

$1800 profit for Jill

Question b1. What is jack’s dominant strategy? Explain (3 marks)

Question b2. What Jill’s dominant strategy? Explain (3 marks)

Question b3. Total profit would be highest if both produced at a low rate? Would they do that? Why or why not? (3 marks)

Question b4. Case Study: OPEC and the World Oil Market: As a cartel is OPEC any exception to the lesson learned from Jill and Jack’s fictitious example? Explain (2 marks)