Microeconomics Mock Q's 1-3
FHNW IM
FHNW IM
Set of flashcards Details
| Flashcards | 86 |
|---|---|
| Language | English |
| Category | Micro-Economics |
| Level | University |
| Created / Updated | 29.06.2021 / 22.06.2024 |
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I. A Nash equilibrium describes a situation in which there exists at least one dominant strategy for one player.
II. In a Nash equilibrium the aggregate payoff of the players is maximised.
III. At the Nash equilibrium, expected behaviour and actual behaviour converge.
In the table below, the figures on the left-hand side represent the payoff of player A, and the figures on the right hand side represent the payoff of player B.
In a repeated prisoner’s dilemma game, the likelihood of a cooperative outcome increases if:
AtlanticWings is a nationall airline that was recently granted a new route. It estimates that the aggregate annual market demand function for that route is as follows:
Qdair travel = 25,000 – 50 P air travel
Qd air travel : number of one-way tickets bought in one year
P air travel : unit price for a one-way air ticket
Assume the marginal cost of the transportation of one passenger is constant and amounts to CHF 40. For the purpose of this question, neglect fixed cost (i.e. assume that there is no fixed cost).
If fixed cost is not taken into account, how much profit would AtlanticWings earn with that route?
With marginal cost at 40 and a unit price of 270 a profit of 230 is generated by each ticket sold. With a quantity of 11,500, total profit amounts to
11,500 x 230 = 2,645,000
AtlanticWings has conducted some market research and found out that its clients can be grouped into business clients who indicate a willingness to pay extra to fly business class, and holiday travellers choosing “economy class”. The aggregate demand curve of business travellers is P business = 4500 – 0.5Q business and the aggregate demand curve of economy class passengers is
P economy = 333 – 0.021 Q economy.
The marginal cost for transporting both types of passengers is 40.
AtlanticWings now decides to switch to third degree-price discrimination.
Find the profit maximising price and quantity for business class passengers.
MR = MC = 40 = 4500 – 1Q
Q = 4,460
P business = 4500 – 0.5 Q business
P business = 4500 – 2230 = 2,270
AtlanticWings has conducted some market research and found out that its clients can be grouped into business clients who indicate a willingness to pay extra to fly business class, and holiday travellers choosing “economy class”. The aggregate demand curve of business travellers is P business = 4500 – 0.5Q business and the aggregate demand curve of economy class passengers is
P economy = 333 – 0.021 Q economy.
The marginal cost for transporting both types of passengers is 40.
Find the profit maximising price and quantity for economy class passengers
MR = MC = 40 = 333 – 0.042 Q
293 = 0.042 Q
Q = 6,976
P economy = 333 – 0.021 Q economy
P economy = 333 – 0.021 x 6,976 = 186.5
AtlanticWings is a nationall airline that was recently granted a new route. It estimates that the aggregate annual market demand function for that route is as follows:
Qdair travel = 25,000 – 50 P air travel
Qd air travel : number of one-way tickets bought in one year
P air travel : unit price for a one-way air ticket
With marginal cost at 40 and a unit price of 270 a profit of 230 is generated by each ticket sold. With a quantity of 11,500, total profit amounts to
11,500 x 230 = 2,645,000
If fixed costs are not taken into account, how much total profit would AtlanticWings make with third-degree price differentiation?
Profit made in the business class:
(2,270 – 40) x 4,460 = 9,945,800
Profit made in the economy class:
(186.5 – 40) x 6,976 = 1,021,984
Total profit: 10,967,784
Please compare
A)With marginal cost at 40 and a unit price of 270 a profit of 230 is generated by each ticket sold. With a quantity of 11,500, total profit amounts to
11,500 x 230 = 2,645,000
B)Profit made in the business class:
(2,270 – 40) x 4,460 = 9,945,800
Profit made in the economy class:
(186.5 – 40) x 6,976 = 1,021,984
Total profit: 10,967,784
10,967,784 – 2,645,000 = 8,322,784
Due to third degree price discrimination profit could be much increased (by 314%).
In your job for the private office of a wealthy family, you have to make rational investment decisions. Presently, you are faced with two investment opportunities. The first is an investment project with a sure payoff of 5,200,000. As your second option, you could invest the same amount in a highly risky investment project. If that project goes well, the return would be 12,800,000. However, if it fails, there will be no return whatsoever. According to your estimates, the probability of earning the 12,800,000 is 35 percent only.
In the case of the highly risky investment project (i.e., the lottery), what is the probability that there will be no return whatsoever?
65%
In your job for the private office of a wealthy family, you have to make rational investment decisions. Presently, you are faced with two investment opportunities. The first is an investment project with a sure payoff of 5,200,000. As your second option, you could invest the same amount in a highly risky investment project. If that project goes well, the return would be 12,800,000. However, if it fails, there will be no return whatsoever. According to your estimates, the probability of earning the 12,800,000 is 35 percent only.
Calculate the expected value of the highly risky investment project (i.e., the lottery
EV lottery = 0.35 12,800,000 + 0.65 0 = 4,480,000
In your job for the private office of a wealthy family, you have to make rational investment decisions. Presently, you are faced with two investment opportunities. The first is an investment project with a sure payoff of 5,200,000. As your second option, you could invest the same amount in a highly risky investment project. If that project goes well, the return would be 12,800,000. However, if it fails, there will be no return whatsoever. According to your estimates, the probability of earning the 12,800,000 is 35 percent only.
Given the family office (i.e., your employer) is risk averse and has a utility function determined by U = (Expected Value)0.5 , find the risk premium associated with the highly risky investment project (i.e., the lottery
0.35 12,800,0000.5 + 0.65 0 = (5,200,000 – RP) 0.5
1,252.2 = (5,200,000 – RP) 0.5
1,568,004.85 = 5,200,000 – RP
RP = 3,631,995.15
Explicate what is meant by the term “risk premium”.
The term “risk premium” describes the necessary difference between the expected value of a lottery and the payoff of a sure thing to make a risk averse decision maker indifferent between the lottery and the sure thing. It is the amount by which the payoff of the sure thing must decrease to make the decision maker indifferent between it and the lottery.
There are two countries, both producing the same goods in identical quality standards. The respective quantities produced per 100 labour hours (i.e. the monthly output of one worker) are given in the table below:
According to the data in the table above, which one of the following statements is correct?
If country B specialises in the production of that good where it has a comparative advantage, at which unit price is it most likely going to offer that good in country A, if one of the objectives is to drive competitors in country A out of business?
0.49 units of good 1
I. According to the theory of comparative advantage, free trade between two countries is mutually beneficial, if each country specialises in the production of those goods where the opportunity cost of producing another unit is only marginally higher than in the other country.
II. According to the theory of comparative advantage, free trade between two countries is mutually beneficial, if each country specialises in the production of those goods where the opportunity cost of producing another unit is lower than in the other country.
III. According to the theory of comparative advantage, free trade between two countries is mutually beneficial only, if at least one country has an absolute advantage in the production of one good.
In the local market for waterproof jackets, the aggregate demand curve is given by the equation
Qdjacket = 200 – 0.5Pjacket
Qdjacket : quantity of waterproof jackets demanded (per month)
Pjacket : unit price of a waterproof jacket
Draw the inverse demand function (= demand curve) in the diagram below. Clearlyindicate the numerical values of the points where the inverse demand functionintersects with the x- and the y-axis.
In the local market for waterproof jackets, the aggregate demand curve is given bythe equation
Qdjacket = 200 – 0.5Pjacket
Qdjacket : quantity of waterproof jackets demanded (per month)
Pjacket : unit price of a waterproof jacket
If the unit price is 300, how big is the quantity demanded?
50
In the local market for waterproof jackets, the aggregate demand curve is given bythe equation
Qdjacket = 200 – 0.5Pjacket
Qdjacket : quantity of waterproof jackets demanded (per month)
Pjacket : unit price of a waterproof jacket
Calculate the consumer surplus for a unit price of 300.
(50 × 100) / 2 = 2500
In the local market for waterproof jackets, the aggregate demand curve is given bythe equation
Qdjacket = 200 – 0.5Pjacket
Qdjacket : quantity of waterproof jackets demanded (per month)
Pjacket : unit price of a waterproof jacket
Explicate the term “consumer surplus
Consumer surplus refers to the difference a consumer is willing to pay for a goodand the actual amount he or she actually has to pay when buying it.
For any particular good, an increase in the price of a complement would most likelyresult in?
Statement I: If close substitutes are easily available for a particular good, the priceelasticity of demand for that good cannot be identified.
Statement II: If a relatively large proportion of a person’s income is spent on aparticular good, the price elasticity of demand for that good is most likelyrelatively high.
Which of the following is true?
Statement I: If the price elasticity of demand for a good equals -1.25, an increase inprice will result in a decrease in total revenue.
Statement II: If a decrease in price leads to a decrease in total revenue, demand forthe good is price elastic.
When a rent ceiling (maximum price) is imposed below the equilibrium marketprice, which of the following is most likely?
Which of the following is least likely regarding indifference curves?
Robert’s MRSxy is given by 2.5. If Good Y is on the y axis and Good X is on the x axis,the slope of the indifference curve is closest to?
This question addresses the budget constraint: The amount of Good A that aconsumer would have to give up in order to consume 1 more unit of Good B is givenby:
The following diagram illustrates a consumer’s optimal combination of good Aand good B (given her preferences as illustrated by the indifference curve) andthe budget constraint BEFORE AND AFTER a given price REDUCTION of good A.
A)Show and identify in the above diagram the so-called substitution effect.
b)Show and identify in the above diagram the so-called income effect.
c)Is good A and inferior, Giffen, or normal good? Substantiate your answer.
d)The change in the quantity consumed of good A is partly due to the substitutioneffect and the income effect. Explain what these two effects mean.
C) It is a normal good. The price reduction leads to both a positive substitution effectand a positive income effect.
d) substitution effect: The change in the amount of a good that would be consumed as the price of that good changes, holding constant all other prices and the level of utility. It is measured on the initial indifference curve/utility level.
income effect: The change in the amount of a good that a consumer would buy as purchasing power changes, holding all prices constant.
The diagram below illustrates the situation of a firm in a perfectly competitivemarket. Assume that all fixed cost is sunk cost.
a)Explicate the meaning and the implications of the concept of
perfect competition
b)Clearly illustrate the profit maximising (loss minimising) quantity that this firmwill produce
c)Does this firm earn an economic profit? If so, indicate in the diagram theeconomic profit made by this firm. Comment your answer.
D)Explicate the meaning of and the difference between the two terms “shortrun” and “long run”.
a)Full information about prices: All market participants realize immediately if a goodis overpriced.
•Equal access to resources: All producers produce under identical conditions.
•Price taker: see above: undifferentiated products & fragmented industry.
•Law of one price: see above: undifferentiated products & fragmented industry &full information about prices.
•Free entry: this secures competition and leads to the elimination of economic profitin the long run.
c) This firm does not generate an economic profit, nor an accounting profit. This is so because marginal revenue (i.e. the unit price) only covers average variable cost. Only if the unit price lies above average total cost does a company generate an economic profit.
In the illustrated situation, however, the firm is unable to even cover fixed cost, like interest paid on borrowed capital, leasing rates etc. Therefore, as only variable costs are covered, a loss occurs, even in accounting terms.
d) Short run: The period of time in which at least one of the firm’s input quantities cannot be changed.
Long run: The period of time in which all of the firm’s input quantities can be changed, everything is variable. The long run is a projection window, in which the firm can re-decide whether it wants to produce at all, and if so, where and with how much capital.
The following diagram illustrates, for the short-run, the situation of a firm undermonopolistic competition. The barriers to entry in that market are low.
a)Name/identify the two linear functions labelled 1 and 2.
b)Indicate/Illustrate in the diagram above the produced and supplied quantity aswell as the unit price charged by the firm.
c)Illustrate in the diagram above the economic profit earned by the firm
d)The economic profit earned by the firm attracts new entries into that market.Illustrate in the diagram below the effects of that increase in competition on thedemand for the firm’s produce and comment on the consequences for the unit price,the quantity produced and sold as well as for the economic profit made by the firm.
e)Where, in the long-run, i.e. at the end of the short-run, is the demand curve likely tobe positioned? Illustrate in the diagram below the most likely position of the demandcurve at the end of the short-run.
In a monopolisitcally competitive market, a firm faces diminishing marginal revenue.
The market demand function for product A is given by the equation
QdA = 100 – 0.5PA
QdA : quantity of good A demanded
PA : unit price of good A
What is the corresponding marginal revenue function? Remember: You first have to calculate the inverse demand function
QdA = 100 – 0.5PA
0.5PA = 100 – QdA
PA = 200 – 2QdA MR = 200 – 4QdA
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