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ECO101A: TUTORIAL PROBLEM SET 1 (SUMMER TERM 2016, 30th May)

NOTE: COLLECT PRACTICE PROBLEM SET 1 FROM HALL 4 XEROX CENTER


1. Which of the following two statements involves positive economic analysis and
which normative? How do the two kinds of analysis differ?
a. Gasoline rationing (allocating to each individual a maximum amount of
gasoline that can be purchased each year) is a poor social policy because it
interferes with the workings of the competitive market system.
b. Gasoline rationing is a policy under which more people are made worse off
than are made better off.
2. The following table shows the average retail price of butter and the Consumer Price
Index from 1980 to 2000 , scaled so that the CPI = 100 in 1980.
1980
100
CPI
Retail Price of Butter $1.88
(salted, grade AA, per
lb.)

1985

1990

1995

2000

130.58
$2.12

158.56
$1.99

184.95
$1.61

208.98
$2.52

a) Calculate the real price of butter in 1980 dollars. Has the real price increased /
decreased / stayed the same since 1980? What is the percentage change in the real
price (1980 dollars) from 1980 to 2000?
b) Convert the CPI into 1990 = 100 and determine the real price of butter in 1990
dollars. What is the percentage change in the real price (1990 dollars) from 1980
to 2000? Compare this with your answer in (b). What do you notice? Explain.
3. In 1998, Americans smoked 470 billion cigarettes, or 23.5 billion packs of cigarettes. The
average retail price was $2 per pack. Statistical studies have shown that the price
elasticity of demand is 0.4, and the price elasticity of supply is 0.5. Using this
information, derive linear demand and supply curves for the cigarette market.
4. Consider the following demand and supply relationships in the market for golf balls: Q D=
90 2P 2T and QS = 9 + 5P 2.5R, where T is the price of titanium, a metal used to
make golf clubs, and R is the price of rubber.
a. If R = 2 and T = 10, calculate the equilibrium price and quantity of golf balls.
b. At the equilibrium values, calculate the price elasticity of demand and the
price elasticity of supply.
c. At the equilibrium values, calculate the crossprice elasticity of demand for
golf balls with respect to the price of titanium. What do the sign of this

elasticity tell you about whether golf balls and titanium are substitutes or
complements?
5. Suppose the demand curve for a product is given by Q = 10 2P + PS, where P is the
price of the product and PS is the price of a substitute good. The price of the substitute
good is $2.00. Suppose P = $1.00. What is the price elasticity of demand? What is the
cross-price elasticity of demand? Suppose the price of the good, P, goes to $2.00.Now
what is the price elasticity of demand? What is the cross-price elasticity of demand?
6.
a. A demand function is given by xp n = k, where n and k are constants. Calculate the
price elasticity of demand.
b. Given p = 40-x , find the value of x if e d = 1.
7. Find the elasticity of demand (e d), in terms of x for each of the demand laws. Also find
the values of x when ed is equal to unity in each case.
a. P = (a-bx)1/2
b. P = (a- bx)2
c. P = a- bx2
8. The demand curve for bananas is given by p = 800 2q. At what point on the demand
curve is the price elasticity of demand for bananas equal to 1?
9. Suppose the demand for natural gas is perfectly inelastic. What would be the effect, if
any, of natural gas price controls?
10. Suppose that the current price of a product is $30 per unit. At this price, 18,000 units will
be sold. If the price is lowered to $24, sales will increase to 20,000 units. What is the
price elasticity of demand at $30 and at $24? What is the arc elasticity of demand over
the price range of $24 and $30?

ECO101A: TUTORIAL PROBLEM SET 2 (SUMMER TERM 31st May, 2016)


1. What are the four basic assumptions about individual preferences?
2. What happens to the MRS as you move along a convex indifference curve? A linear
indifference curve?
3. Comment on the shape of indifference curve and nature of MRS for the following
a. Perfect substitutes
b. Perfect Compliments
4. Antonio buys five new college textbooks during his first year at school at a cost of $80
each. Used books cost only $50 each. When the bookstore announces that there will be a
10 percent increase in the price of new books and a 5 percent increase in the price of used
books, Antonios father offers him $40 extra.
a. What happens to Antonios budget line? Illustrate the change with new books on
the vertical axis.
b. Is Antonio worse or better off after the price change?
5. Sam has preferences for weekly Video Games (V) and Sodas (S) described by the utility
function U (V, S) = V2S2. Suppose the prices are denoted by p V and pS and Sam has
income given by I. Assume that in Sams optimal bundle, he consumes strictly positive
quantities of both goods.
a. Write out Sams optimization problem and the associated Lagrangian
expression
b. Compute the three critical value (first-order) conditions from the Lagrangian.
c. Using your answer to part 2, find the expression for the optimal bundles as
functions of the prices and income
6. A consumer has the utility function over goods x and y, u(x, y) = 12x2 y4. Let the price of
good x be given by px, let the price of good y be given by p y, and let income be given by
M.
a. What is the slope of the consumers indifference curve at the consumption bundle
(1, 1)?
b. Derive the consumers generalized demand function for goods x and y.
c. If we have px = 2, py = 2, and M = 24, compute the utility maximizing
consumption bundle.
2

7. Maurice has the following utility function: U(X,Y) 20X 80Y X 2Y , where X is
his consumption of CDs, with a price of $1, and Y is his consumption of movie videos,
with a rental price of $2. He plans to spend $41 on both forms of entertainment.
Determine the number of CDs and video rentals that will maximize Maurices utility.
8. Suppose the utility functionU(x, y) =x+ln(y) represents someones preferences for goods
x and y. Let I denote income, px the price of x and py the price of y.
a. Calculate the marginal rate of substitution and show why at the optimal
consumption point it must be equal to the relative price of x and y.

b. Derive the optimal demands for x and y as functions of income and prices.
9. A consumer has a budget of I = 16 to use for goods x and y. The initial prices are Px =Py
=1. Her preferences can be described with a Cobb-Douglas utility function,U(x, y)=xy
which gives rise to the following demand functions: x(P x , Py , I ) = I/2Px and : y(Px , Py ,
I ) = I/2Py.
a. What is the optimal consumption bundle, and the level of utility that the consumer
reaches with this bundle?
b. If the price of x increases to Px = 4, what is the new optimal consumption point?
Given the new prices, determine what is the new income required to reach the
original level of utility, and what would be the optimal consumption point in this
case.
c. What are the income and substitution effect of the price change?
10. The utility that Meredith receives by consuming food F and clothing C is given by
U(F,C) = FC. Suppose that Merediths income in 1990 is $1200 and that the prices of
food and clothing are $1 per unit for each. By 2000, however, the price of food has
increased to $2 and the price of clothing to $3. Let 100 represent the cost of living index
for 1990. Calculate the ideal and the Laspeyres cost-of-living index for Meredith for
2000. (Hint: Meredith will spend equal amounts on food and clothing with these
preferences.)

ECO101 A TUTORIAL PROBLEM SET 3(SUMMER TERM 2016)

1. Do the following functions exhibit increasing, constant, or decreasing returns to


scale? What happens to the marginal product of each individual factor as that factor
is increased and the other factor held constant?
a. q=3L+2K
b. q=(2L+2K)1/2
c. q=
2. Suppose that the production function for DVDs is given by Q=KL2 L3, where Q is
the number of disks produced per year, K is machinehours of capital, and L is man
hours of labor.
a. Suppose K=600. Find the total product function and graph it over the
range L=0 and L=500. Then sketch the graphs of the average and
marginal product functions. At what level of labor L does the average
product curve appear to reach its maximum? At what level does the
marginal product curve appear to reach its maximum?
3. The marginal product of labor in the production of computer chips is 50 chips per
hour. The marginal rate of technical substitution of hours of labor for hours of
machine capital is 1/4. What is the marginal product of capital?
4. Suppose the production of digital cameras is characterized by the production
function Q = LK, where Q represents the number of digital cameras produced.
Suppose that the price of labor is $10 per unit and the price of capital is $1 per unit.
a. Graph the isoquant for Q = 121,000. On the graph you drew for part a, draw
several isocost lines including one that is tangent to the isoquant you drew.
What is the slope of the isocost lines?
b. Find the cost-minimizing combination of labor and capital for a
manufacturer that wants to produce 121,000 digital cameras. Mark this point
on the graph you drew for part a.
5. A firm has the following production function: Q: L1/3K1/2.
a. Does this production function exhibit increasing, decreasing, or constant
returns to scale?
b. Suppose in SR capital is fixed at K = 100. Find firms unconditional factor
demand for labour
c. Find firms unconditional factor demands in the long run.

1/2

1/2

6. Using the given production function Q = L K . Determine the following


a) Input demand functions
b) Cost function
c) MRTS(L,K)
d) Expansion Path
7. Derive the cost function and conditional factor demands for the Cobb-Douglas utility

function of the form: f(z1 , z2) = z1 z2 .


8. Consider the production function f(L,K) = 2L1/4K1/2
a. Find the associated (long run) total, average, and marginal cost curves.
b. Sketch the total, average, and marginal cost curves.
0.75

0.25

9. Consider the given production function Q = L K .


a) Find MP of L and K.
b) Determine MRTSLK & Elasticity of substitution.
10. Isoquants can be convex, linear, or L-shaped. What does each of these shapes tell
you about the nature of the production function? What does each of these shapes
tell you about the MRTS?

EC0101/101A: TUTORIAL PROBLEM SET 04(SUMMER TERM 2016)


1. A firm has a fixed production cost of $5000 and a constant marginal cost of production of
$500 per unit produced.
a. What is the firms total cost function? Average cost?
b. If the firm wanted to minimize the average total cost, would it choose to be very
large or very small? Explain.
2. The short-run cost function of a company is given by the equation TC=200+55q, where
TC is the total cost and q is the total quantity of output, both measured in thousands.
a. What is the companys fixed cost?
b. If the company produced 100,000 units of goods, what is its average variable
cost? What is its marginal cost per unit produced? What is its average fixed cost?
3. Suppose the cost function is C(q)=4q2 +16. 1.
a. Find variable cost, fixed cost, average cost, average variable cost, and average
fixed cost.
b. Show the average cost, marginal cost, and average variable cost curves on a
graph.
c. Find the output that minimizes average cost. At what range of prices will the firm
produce a positive output?
d. At what range of prices will the firm earn a positive and negative profit?
4. You manage a plant that mass-produces engines by teams of workers using assembly
machines. The technology is summarized by the production function q 5 KL, where q is
the number of engines per week, K is the number of assembly machines, and L is the
number of labor teams. Each assembly machine rents for r $10,000 per week, and each
team costs w $5000 per week. Engine costs are given by the cost of labor teams and
machines, plus $2000 per engine for raw materials. Your plant has a fixed installation of
5 assembly machines as part of its design.
a. What is the cost function for your plantnamely, how much would it cost to
produce q engines? What are average and marginal costs for producing q
engines? How do average costs vary with output?
b. How many teams are required to produce 250 engines? What is the average cost
per engine?
c. You are asked to make recommendations for the design of a new production
facility. What capital/labor (K/L) ratio should the new plant accommodate if it
wants to minimize the total cost of producing at any level of output q?
5. In a certain market in the long-run, each firm and potential entrant has a long-run
average cost curve is given by AC = 10q2- 5q+20 and long-run marginal cost curve is
given by MC = 30q2- 10+2q; where q is thousands of units per year. Market demand is
given D(q) = 39000- 2000p.
a. In equilibrium, how many units will each firm produce? Also find market
equilibrium price.

b. What is the equilibrium number of firms in the long-run?


6. Suppose a firms short-run total cost curve is given by STC (q) = 30q2+25q+15. What is
the equation for the firms short-run supply curve?
7. Suppose an industry has 200 identical firms, each with the short-run supply curve

P 100 1000Q
i

What is the short-run industry supply curve?


8. The Total cost curve function and Marginal cost curve function of a firm is given below

TC 100 Q 2
MC 2Q
P $60
a. Should the firm stay open (produce Q > 0)?
b. What is the profit-maximizing level of Q?
c. What are the firms economic profits?
9. Consider a market composed of 10 identical firms, each with the cost curves given below

TC 100 Q 2
MC 2Q
Assume the market demand curve takes the form

Q 100 20P
d
a. What is the equilibrium price and quantity in this market?
b. What quantity does each firm produce?
c. What are profits for a representative firm? What would profits be if a representative firm
shut down?
10. Suppose that a firms production function is q = 9m1/2 in the short run, where there are
fixed costs of $1000, and m is the variable input whose cost is $4000 per unit.
a. What is the total cost of producing a level of output q? In other words, identify the
total cost function C(q).
b. Write down the equation for the supply curve.
c. If price is $1000, how many units will the firm produce? What is the level of
profit? Illustrate on a cost curve graph.

TUTORIAL PROBLEM SET 5 (SUMMER TERM 2016)


1. A competitive firm has the following short run cost function: C(q) = q3 8q +30q + 5.
a. Find MC, AC , AVC and Show graphically.
b. At what range of prices will the firm supply zero output?
c. Identify the firms supply curve on your graph.
d. At what price would the firm supply exactly 6 units of output?
2. Suppose you are given the following information about a particular industry:
Market Demand: QD = 6500-100p; Market Supply: QS = 1200p and C(q) = 722+ q2/200
Assume that all firms are identical, and that the market is characterized by pure competition.
a. Find the equilibrium price, the equilibrium quantity, the output supplied by the
firm, and the profit of the firm.
b. Would you expect to see entry into or exit from the industry in the long-run?
Explain. What effect will entry or exit have on market equilibrium?
c. What is the lowest price at which each firm would sell its output in the long
run? Is profit positive, negative, or zero at this price? Explain.
d. What is the lowest price at which each firm would sell its output in the short
run? Is profit positive, negative, or zero at this price? Explain.
3. Suppose that a competitive firms marginal cost of producing output q is given by MC(q) = 3 +
2q.Assume that the market price of the firms product is $9.What level of output will the firm
produce? What is the firms producer surplus?
4. A number of stores offer film developing as a service to their customers. Suppose that each
store offering this service has a cost function C(q) = 50+0.5q+0.08q2 .
a. If the going rate for developing a roll of film is $8.50, is the industry in long-run
equilibrium? If not, find the price associated with long-run equilibrium.
b. Suppose now that a new technology is developed which will reduce the cost of film
developing by 25%. Assuming that the industry is in long-run equilibrium, how much
would any one store be willing to pay to purchase this new technology?
5. A particular metal is traded in a highly competitive world market at a world price of $9 per
ounce. Unlimited quantities are available for import into the United States at this price. The
supply of this metal from domestic U.S. mines and mills can be represented by the equation QS =
2/3 P, where QS is U.S. output in million ounces and P is the domestic price. The demand for the
metal in the United States is QD = 40-2P , where QD is the domestic demand in million ounces .In
recent years the U.S. industry has been protected by a tariff of $9 per ounce. Under pressure
from other foreign governments, the United States plans to reduce this tariff to zero.
Threatened by this change, the U.S. industry is seeking a voluntary restraint agreement that
would limit imports into the United States to 8 million ounces per year.
a. Under the $9 tariff, what was the U.S. domestic price of the metal?
b. If the United States eliminates the tariff and the voluntary restraint agreement is
approved, what will be the U.S. domestic price of the metal?

6. Among the tax proposals regularly considered by Congress is an additional tax on distilled
liquors. The tax would not apply to beer. The price elasticity of supply of liquor is 4.0, and the
price elasticity of demand is - 0.2. The cross-elasticity of demand for beer with respect to the
price of liquor is 0.1.
a. If the new tax is imposed, who will bear the greater burdenliquor suppliers or
liquor consumers? Why?
b. Assuming that beer supply is infinitely elastic, how will the new tax affect the beer
market?
7. The United States currently imports all of its coffee. The annual demand for coffee by U.S.
consumers is given by the demand curve Q = 250 10P, where Q is quantity (in millions of
pounds) and P is the market price per pound of coffee. World producers can harvest and ship
coffee to U.S. distributors at a constant marginal (= average) cost of $8 per pound. U.S.
distributors can in turn distribute coffee for a constant $2 per pound. The U.S. coffee market is
competitive. Congress is considering a tariff on coffee imports of $2 per pound.
a. If there is no tariff, how much do consumers pay for a pound of coffee? What is the quantity
demanded?
b. If the tariff is imposed, how much will consumers pay for a pound of coffee? What is the
quantity demanded?
c. Calculate the lost consumer surplus and also calculate the tax revenue collected by the
government
8. From time to time, Congress has raised the minimum wage. Some people suggested that a
government subsidy could help employers finance the higher wage. This exercise examines the
economics of a minimum wage and wage subsidies. Suppose the supply of low-skilled labor is
given by LS = 10w, where LS is the quantity of low-skilled labor (in millions of persons employed
each year), and w is the wage rate (in dollars per hour). The demand for labor is given by L D = 80
- 10w.
a. What will be the free-market wage rate and employment level? Suppose the government sets a
minimum wage of $5 per hour. How many people would then be employed?
b. Suppose that instead of a minimum wage, the government pays a subsidy of $1 per hour for
each employee. What will the total level of employment be now? What will the equilibrium
wage rate be?
9. Consider the market for haircuts in the small town of Harrison, Wisconsin, during a typical day.
In this market, hair stylists are producers and any resident of Harrison with hair is a consumer.
There is only one type of haircut in Harrison. The demand curve and supply curves for the
market for haircuts are given by QD= 25-0.5p and QS = 2p
a. Find the equilibrium price and quantity in this market for haircuts.
b. Calculate the consumer's surplus, producer's surplus and total surplus in the market for
haircuts.
Assume now that the government of Harrison imposes a quota of 10 haircuts per day. That
is, the government of Harrison is going to limit the number of haircuts per day to a total of
10 haircuts irrespective of the demand for haircuts. To implement this quota, the

government requires that hair stylists purchase an operating license that allows them to cut
hair.
c. At what price will consumers demand exactly 10 haircuts? What price must producers
receive in order to be willing to sell exactly 10 haircuts?
d. Calculate the consumer surplus, producer surplus, and the total amount of money
collected by the town from selling licenses. Add these three numbers to find the total
surplus with the quota.
10. Consider the market for coconuts in a small island nation. The domestic demand curve (in
Dollars) is P = 140 4Qd and the domestic supply curve is P = 20 + 2Qs.
a. What is the market equilibrium price and quantity?
b. If the government, hoping to help poor consumers, imposes a price ceiling of $40, what
will be the shortage of coconuts in the market? Graph your response.
c. What price floor would yield a surplus of 9 coconuts?
d. Suppose the government price target is $80, which they plan to accomplish by use of a
price support program. How many coconuts will the government have to buy with this
program, and how much will the program cost the government? Graph your results, and
shade the region corresponding to total government cost.
11. Lets say the U.S. has the following supply and demand curves for oil where quantity is
measured in millions of barrels of oil and price is measured as price per barrel of oil: Supply:
Qs = (1/5)P Demand: Qd = 30 (1/10)P.
a. Assuming the U.S. does not export or import any oil, find the equilibrium price and
quantity for U.S. oil.
b. Calculate consumer surplus, producer surplus, and total surplus.
c. Now suppose the U.S. allows oil to be imported and exported. If the world price is $200
per barrel of oil, what are the new consumer surplus, producer surplus, and total
surplus when this market opens to trade? Is the U.S. importing or exporting oil?
d. Recalculate the consumer surplus, producer surplus, and total surplus if the world price
is $50 per barrel of oil. Is the U.S. importing or exporting oil?
e. With the world price at $50, the U.S. decides it wants to reduce its dependence on
foreign oil so it places a tariff on imported oil of $10 per barrel of oil. Find consumer
surplus, producer surplus, government revenue (from the tariff), and deadweight loss.
f. If the world price is still $50 per barrel of oil and the U.S. instead institutes a quota (a
limit on the quantity imported) of barrels of 9 million barrels, what are the new
consumer surplus, producer surplus, license holder revenue and deadweight loss?

SUMMER TERM 2016 TUTORIAL PROBLEM SET 06

COLLECT PRACTICE PROBLEM 4 AND 5 FROM HALL 4 XEROX CENTER.

1. A monopolist faces the following inverse demand functions : P1(X1) = 80-5X1 ; P2(X2)
= 180-20X2 ; C(X) = 20X .Find the equilibrium output levels , Prices and profit when
there is price discrimination and no price discrimination.
2. The demand equation confronting a profit-maximizing monopolist is Q = 25 - 0.5P.
a. Calculate the monopolists total-revenue-maximizing price and output level. At
this output level, calculate the price-elasticity of demand. What is the value of the
Lerner index?
b. Suppose that the monopolists total cost equation is TC = 100 + 20Q. Calculate
the monopolists profit-maximizing price and output level. At this output level,
calculate the price-elasticity of demand. What is the value of the Lerner index?
3. Suppose the demand and cost conditions facing a monopoly are given by:
P= 100-q and C= 700+20q
a. Calculate the monopoly output level, the monopoly price, and the profits of
the firm.
b. Draw a diagram to illustrate your answers to part (a).
c. Explain, illustrate and calculate the deadweight loss from this monopoly.
d. Explain why this market might be considered to be a "natural" monopoly.
4. A monopolist sells in two markets. The inverse demand curves for both markets are as
follows: P1 = 200 q1 ; p2 = 300 q2 and C(q1+q2) = (q1+q2)2 . The firm is able to price
discriminate between the two markets.
a. What quantities will the monopolist sell in the two markets?
b. What price will it charge in each market?
5. A firm faces the following average revenue (demand) curve: P 120 0.02Q where Q is
weekly production and P is price, measured in cents per unit. The firms cost function is
given by C 60Q 25,000. Assume that the firm maximizes profits.
a. What is the level of production, price, and total profit per week?
b. If the government decides to levy a tax of 14 cents per unit on this product,
what will be the new level of production, price, and profit?
6. Daynas Doorstops, Inc. (DD) is a monopolist in the doorstop industry. Its cost is C 100
5Q Q2 , and demand is P 55 2Q.
a. What price should DD set to maximize profit? What output does the firm
produce? How much profit and consumer surplus does DD generate?
b. What would output be if DD acted like a perfect competitor and set MC P?
What profit and consumer surplus would then be generated?
c. What is the deadweight loss from monopoly power in part a?

d. Suppose the government, concerned about the high price of doorstops, sets a
maximum price at $27. How does this affect price, quantity, consumer surplus,
and DDs profit? What is the resulting deadweight loss?
e. Now suppose the government sets the maximum price at $23. How does this
decision affect price, quantity, consumer surplus, DDs profit, and deadweight
loss?
7. A monopolist faces the following demand curve: Q 144/P2, where Q is the quantity
demanded and P is price. Its average variable cost is AVC Q1/2, and its fixed cost is 5.
a. What are its profit-maximizing price and quantity? What is the resulting
profit?
b. Suppose the government regulates the price to be no greater than $4 per unit.
How much will the monopolist produce? What will its profit be?
c. Suppose the government wants to set a ceiling price that induces the
monopolist to produce the largest possible output. What price will accomplish
this goal?
8. Consider two firms facing the demand curve P 50 5Q, where Q Q1 Q2. The
firms cost functions are C1(Q1) 20 10Q1 and C2(Q2) 10 12Q2.
a. Suppose both firms have entered the industry. What is the joint profit-maximizing
level of output? How much will each firm produce? How would your answer
change if the firms have not yet entered the industry?
b. What is each firms equilibrium output and profit if they behave noncooperatively? Use the Cournot model. Draw the firms reaction curves and show
the equilibrium.
9. A monopolist can produce at a constant average (and marginal) cost of AC MC $5. It
faces a market demand curve given by Q 53 P.
a. Calculate the profit-maximizing price and quantity for this monopolist. Also
calculate its profits.
b. Suppose a second firm enters the market. Let Q1 be the output of the first firm
and Q2 be the output of the second. Market demand is now given by Q1 Q2
53 P. Assuming that this second firm has the same costs as the first. Suppose (as
in the Cournot model) that each firm chooses its profit-maximizing level of output
on the assumption that its competitors output is fixed, derive the reaction
function of both firms and plot it graphically. Calculate the Cournot equilibrium
(i.e., the values of Q1 and Q2 for which each firm is doing as well as it can given
its competitors output). What are the resulting market price and profits of each
firm?
c. Suppose Firm 1 is the Stackelberg leader (i.e., makes its output decisions before
Firm 2). Find the reaction curves that tell each firm how much to produce in terms
of the output of its competitor. How much will each firm produce, and what will
its profit be?

d. Suppose there are N firms in the industry, all with the same constant marginal cost, MC
$5. Find the Cournot equilibrium. How much will each firm produce, what will be the
market price, and how much profit will each firm earn? Also, show that as N becomes
large, the market price approaches the price that would prevail under perfect competition.

10. In 1983, the Reagan Administration introduced a new agricultural program called the
Payment-in-Kind Program. To see how the program worked, lets consider the wheat
market whose demand and supply function are given below:
QD = 28 2p ; QS = 4+ 4p , where P is the price of wheat in dollars per
bushel, and Q is the quantity in billions of bushels.
a. Find the free-market equilibrium price and quantity.
b. Now suppose the government wants to lower the supply of wheat by 25% from
the free market equilibrium by paying farmers to withdraw land from production.
However, the payment is made in wheat rather than in dollarshence the name of
the program. The wheat comes from vast government reserves accumulated from
previous price support programs. The amount of wheat paid is equal to the
amount that could have been harvested on the land withdrawn from production.
Farmers are free to sell this wheat on the market. How much is now produced by
farmers? How much is indirectly supplied to the market by the government? What
is the new market price? How much do farmers gain? Do consumers gain or lose?

ECO101/101A TUTORIAL PROBLEM SET 07 (SUMMER TERM 2016)


1. The industry demand curve for a particular market is: Q = 1800 - 200P. The industry
exhibits constant long run average cost at all levels of output, regardless of the market
structure. Long run average cost is a constant $1.50 per unit of output. Calculate market
output, price (if applicable), consumer surplus, and producer surplus (profit) for each of
the scenarios below.
a. Perfect Competition
b. Pure Monopoly
c. First Degree Price Discrimination
2. Demand for light bulbs can be characterized by Q 100 P, where Q is in millions of
boxes of lights sold and P is the price per box. There are two producers of lights,
Everglow (E) and Dimlit (D). They have identical cost functions: C i = 10QI + Qi2 (i =
E, D) and Q = QE + QD.
a. Unable to recognize the potential for collusion, the two firms act as short-run
perfect competitors. What are the equilibrium values of QE, QD, and P? What are
each firms profits?
b. Top management in both firms is replaced. Each new manager independently
recognizes the oligopolistic nature of the light bulb industry and plays Cournot.
What are the equilibrium values of QE, QD, and P? What are each firms profits?
c. Suppose the Everglow manager guesses correctly that Dimlit is playing Cournot,
so Everglow plays Stackelberg. What are the equilibrium values of QE, QD, and
P? What are each firms profits?
d. If the managers of the two companies collude, what are the equilibrium values of
QE, QD, and P? What are each firms profits?
3. Consider two students, Jaeho and Lawrence. Both students are taking an exam in their
math class this week and they are both, independently, trying to decide whether they will
conceal their answers or reveal their answers while working on the exam. It takes time
and effort to conceal answers so both students realize that revealing their answers will
allow them to concentrate more fully on the exam. In addition, they both realize that if
the other student reveals their answers they may potentially improve their scores. Jaeho
knows that he is conceals his answers he will get a 60 on the exam and if he does not
conceal his answers he will get a 65 provided that Lawrence conceals his answers. Jaeho
knows that he will make a 75 on the exam if he conceals his answers while Lawrence
reveals his answers; Jaeho will make an 80 on the exam if both Jaeho and Lawrence do
not conceal their answers. Lawrence believes he will make an 80 on the exam he both
students conceal their answers, an 85 on the exam if he conceals his answers while Jaeho

reveals his answers, an 85 on the exam if he reveals his answers while Jaeho does not
reveal his answers, and an 87 on the exam if both students do not conceal their answers.
Construct a payoff matrix for Jaeho and Lawrence. In the payoff matrix identify the two
strategies that both students face and then enter their payoffs with Jaehos payoff the first
number and Lawrences payoff the second number. Label this payoff matrix fully and
completely.
4.

ECO101/101A TUTORIAL PROBLEM SET 08


NOTE 1: COLLECT PRACTICE PROBLEM SET 06(MCQ) FROM HALL 4 XEROX CENTER
NOTE 2: REMAINING QUESTIONS OF TUTORIAL 5, 6 AND 7 WILL BE DISCUSSED
1. Penalty Kicks: Imagine a kicker and a goalie who confront each other in a penalty kick that will
determine the outcome of the game. The kicker can kick the ball left or right, while the goalie
can choose to jump left or right. Because of the speed of the kick, the decisions need to be
made simultaneously. If the goalie jumps in the same direction as the kick, then the goalie wins
and the kicker loses. If the goalie jumps in the opposite direction of the kick then the kicker wins
and the goalie loses. Model this as a normal form game and write down the matrix that
represents the game you modeled and also find out NE (For simplicity take 1 as win and -1 as
loss).
2. Entering an Industry: A firm (player 1) is considering entering an established industry with one
incumbent firm (player 2). Player 1 must choose whether to enter or to not enter the industry. If
player 1 enters the industry then player 2 can either accommodate the entry, or fight the entry
with a price war. Player 1s most preferred outcome is entering with player 2 not fighting, and
his least preferred outcome is entering with player 2 fighting. Player 2s most preferred outcome
is player 1 not entering, and his least preferred outcome is player 1 entering with player 2
fighting.
a. Model this as an extensive form game tree (choose payoffs that represent the
preferences).
b. How many pure strategies does each player have?
c. Find all the Nash equilibrium of this game.
3. There are two firms namely firm 1 and firm 2. Both these firms have same constant average
costs of $2 per unit. The firms can choose either a high price ($10) or a low price ($5) for their
output. When both firms set a high price, total demand i.e D(q) = 10000 units which is split
evenly between the two firms. When both set a low price, total demand is 18000 which is again
split evenly. If one sets a low price and the second a high price, the low priced firm sells 15000
units, the high priced firm only 2000 units. Analyze the pricing decisions of the two firms as a
non co-operative game
a. Give the normal form representation of the above mention game; construct the pay-off
matrix where the elements of each cell of the matrix are the two firms profits.
b. Find NE of the given games
c. Explain why this is an example of prisoners dilemma game?

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