Microeconomics Exam Questions

Question 1

Indicate whether each of the following statements is true, false, or uncertain, and explain your answer. Use mathematics and/or diagrams to support your answer.

(a) The demand for automobiles must be less elastic than the demand for CD players because a $100 reduction in the price of cars does not affect the number sold nearly as much as a $100 reduction in the price of CD players.

(b) The Internet makes price discrimination less feasible.

(c) Consider a duopoly market in which firms A and B are engaged in Cournot (quantity) competition. If Firm A raised its output level and Firm B maintained its current level of production, then the profits of Firm B would increase.

(d) A cartel will be more successful the more heterogeneous is the product.

Suppose a 10% rise in the price of SK-II skin care product will reduce its consumption by 5% in the short run and 12% in the long run.

(a) What are the short- and long-run own-price elasticities of the demand for SK-II?

(b) Is the demand more or less elastic in the long run than in the short run? Why?

(c) If the government imposes a cosmetics tax that raises the price of SK-II by 5%, will total consumer expenditure on SK-II rise or fall in the short run? What about in the long run?

Since April 2013, Samoa Airlines has begun charging passengers based on their weight. Samoa Airlines flies routes connecting the Samoan Islands, located more than 2,000 miles southwest of Hawaii. The islands are home to some of the world’s biggest people, and now the only airline where passengers weigh in and pay by the pound.

What type of pricing is this? From an economic perspective, does charging passengers by their weight make sense? Will it work? Discuss.

The U.S. government issues Treasury bills as a way to borrow funds for periods up to one year. The Treasury bills are sold by sealed-bid auction. Each participant in the auction submits a sealed bid, which consists of a price and a quantity that the participant is willing to buy at that price. These price-quantity pairs are called competitive bids.

After the close of bids, the government opens the bids and allocates the bills for sale to the highest bidder, then to the next
highest bidder, and so on until it has allocated all the bills for sale. Each successful bidder must pay the amount that they bid.

Question 2

Assume that the participants do not collude in submitting their bids.

(a) Can the price-quantity pairs be used to construct a demand curve for Treasury bills? Explain.

(b) Is the auction a form of price discrimination? If yes, what is the degree of price discrimination? If no, why not?

About a month ago, a consulting company had a problem in the office. The administrative staff could not handle all incoming phone calls. It was problematic that calls from clients went to voice mail during normal business hours. To solve the problem, the company director introduced a new system: calls from the main line would roll over to all entry-level employees after the first
two rings. At the outset, the system seemed great because administrators would pick up most calls as usual, and the safety mechanism meant entry-level employees (an additional six people) were available to answer.

And yet just three days after the installation, an important call was missed. An investigation was conducted and the finding was embarrassing. It turned out there were two entry-level employees who could have answered the phone. The company director was furious and scolded them for not picking up the phones.

(a) Can you use the game of chicken to explain the behaviors of the two entry-level employees?

(b) What suggestions would you make to the company director to solve the missing-phone-call problem? Explain.

In some places (e.g., Hong Kong), banks are not allowed to sell insurance. What are the arguments for and against allowing banks to sell insurance?

Consider trade between two companies: Ali, a Chinese company, and Ama, a U.S. company.

Ali prefers to use RMB (renminbi) as the currency while Ama prefers to use the USD (U.S. dollar).

(a) If Ali and Ama both use RMB to settle transactions, Ali would get benefit of 4 while Ama would get benefit of 3. If they both use USD to settle transactions, Ali would get benefit of 2 while Ama would get benefit of 6. If they use different currencies, each would get benefit of 1. Draw the game in strategic form and identify the Nash equilibrium.

(b) From the perspective of game theory, is the situation above one of zero-sum or positivesum? Explain.

(c) Suppose that Ama could make some strategic moves. What strategic moves would you recommend to Ama? Explain.

(d) Suppose that Ama can choose the currency before Ali. Does Ama have a first-mover advantage? Using a game in extensive form, explain your answer and compare the case in which Ali can choose the currency before Ama.