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The George Washington University Department of Economics Microeconomics 2101.13 Take-Home Final Exam 12/11/2019 THIS TAKE-HOME EXAM IS DUE 8AM 12/16/2019. Hard copies are to be handed in at the beginning of the in-class final exam. Please make sure that your work is handed in on numbered pages that are in order. Please staple or paperclip loose pages. Good Luck! Short Answer Questions 20 Points. Choose only 4 questions. If you answer all 5, only questions 1-4 will be graded (5 points each question) 1) True or false: Because the Cournot equilibrium is a cooperative solution, it explains why prices are higher in markets with fewer firms. Explain your answer. 2) During the annual holiday season, two popular ice cream brands, Turkey Hill and Breyers, offer promotional pricing on their ice cream brands to supermarkets, who then pass these discounts on to consumers. Promotional pricing boosts sales at the end of the year. Each firm must decide whether to offer promotional pricing for Thanksgiving or for Christmas. Neither can afford to offer promotional pricing for both holidays. The payoff matrix for Breyers and Turkey Hill is below: Turkey Hill Thanksgiving Christmas Breyers Thanksgiving 10, 10 4, 12 Christmas 12, 4 6, 6 a) What is the game’s Nash equilibrium? b) Explain why this solution is a Nash equilibrium. 3) The inverse demand for flu vaccinations is given by P = 1,500 – 0.5Q while the inverse supply is given by P = 300 + Q. The vaccine is generating external marginal benefits equal to $1,000 at every price level because it reduces the spread of the flu. Graph this information. Based on the information, do vaccinations generate a negative or positive externality? Identify any deadweight loss. 4) Currently, the Federal Government subsidizes the metro rides of all Federal employees. The subsidies enable employees to commute at a substantial discount. The result has been a significant increase in metro rides since the program started. True or false: A subsidy only helps government employees reduce their commuting costs, and really does nothing for the rest of society. Explain your answer using a diagram. 5) Suppose the 10th floor residents of John Jay dormitory are throwing an all-night floor party for the 10 th floor residents and their invited guests. There are no restrictions on floor parties at the University. However, the bass and continuous dancing are keeping the ninth-floor residents awake, and they just want a good night’s sleep. After numerous phone calls between the Floor Reps, the Reps decide to each send an Econ student to work out a solution that both floors would accept. Each Econ student surveyed her floormates and knows how much each resident of her floor is willing to pay to continue (or shut down) the party. a) Can the Econ students find an optimal solution that doesn’t involve the campus police? Explain. b) Using your answer above, put together your own numerical example, where the optimal solution is for the 10 th floor to party all night. Longer Problems: 30 Points (2 points each sub-question). Write your answers and show your work. 1. Assume the market for smart phones is a duopoly consisting of two firms--Pear and Dusung. Market Demand is , where is thousands of phones per month. Each of the firms has identical total cost curves. The total cost curve of each duopolist is , where is thousands of phones per month. Suppose the two firms collude through sharing all information and holding monthly lunch meetings: a) Calculate the profit maximizing price, output per month and the corresponding profit for each firm. b) If the phones were sold at the competitive price, what would be the price and quantity sold. c) Explain, using a diagram and/or equation, that despite the solid cooperation, each firm still has the incentive to cheat on the collusive agreement. Suppose the collusive agreement is declared illegal, and the firms can not cooperate. They change behavior and each chooses the best output level given the output of the competition. The Cournot model best describes their behavior. d) What are reaction functions of each firm? Explain. e) Find the Cournot equilibrium and show with a graph. f) What is the profit maximizing output and price for each firm at the Cournot equilibrium? g) Calculate the total surplus. Show, using a diagram. h) Explain using your calculations of surplus, why each type of firm behavior— collusion, competition, Cournot duopoly-- has a different impact on the well-being of society. 2. Suppose a monopsonist in the mining industry faces the following the labor demand and supply curves: Labor Demand is , where W is the annual wage and is the number of workers hired. Labor supply is , where is the number of workers willing to work at the wage W. a) Calculate the marginal expenditure equation the monopsonist faces. b) Determine the optimal number of workers the monopsonist hires and the wage paid. c) What would be the competitive wage and employment level in this market? d) Calculate the deadweight loss resulting from the monopsonist’s wage and employment decision. e) Suppose the government sets a minimum wage that is $15,000 per year per worker. How does this wage impact the monopsonist’s decision? Explain, by using a diagram to show how this impacts the monopsonist’s marginal expenditure curve. f) Suppose the government raises the minimum wage to $21,000. How does this wage impact the monopsonists decision? Explain by using a diagram to show how this impacts the monopsonist’s marginal expenditure curve g) How might this model help you to argue that a minimum wage could be beneficial to society?