Case Questions

Question 1

Think of a Competitive Market.
Suppose, the German government imposes stricter rent control laws, following the Corona crisis.
Whats the effect of these laws on the equilibrium rental price and quantity of apartments?

Answer 1

• rent control laws typically set max price, which is often set below market equilibrium price
• Qty appartements: increase in qty demanded bc cheaper now; decrease in qty from suppliers at the same time
  -> shortage

Question 2

The German government collects a 1€ Corona tax on several goods to raise additional revenues for financing expenses related to the
Corona crisis.
What share of the tax is paid by consumers and firms in each of the
following cases?

1. The demand curve is vertical at quantity Q and the supply curve is upward sloping (i.e. cigarettes).
2. The demand curve is horizontal at price p and the supply curve is upward sloping (jewellery).
3. The demand curve is downward sloping and the supply curve is horizontal at price p (i.e. beer).

Answer 2

1. all paid by buyers
2. all paid by suppliers
3. all paid by buyers

Question 3

Gail works in a flower shop, where she produces 10 floral arrangements per hour.
She is paid $12 an hour for the first eight hours she works and $18 an hour for each additional hour she
works.

What is the firm’s total cost and marginal cost and average cost functions?

Q= nr of floral arrangements
h= nr of hours worked

Answer 3

She produces 10 in an hour, so h=Q/10
- TC for first 8 hours: 12x(Q/10)
- for 8+ hours: TC=12x8=96

TC= 96 + 18 x ((Q-80)/10)

Question 4

What is the effect on the short-run equilibrium of a specific subsidy of s per unit that is given to all n firms in a market?
What is the incidence of the subsidy?

Answer 4

• supply is affected; cost of production for each unit is reduced by s
  -> incentive to produce more
• supply curve shifts downward bc of lower production costs and increased supply at each level
• new equilibrium: lower P, higher Q
• consumers have lower market P (if inelastic, will benefit more)
• producers benefit (if supply inelastic, will benefit more because additional revenue from subsidy is higher)

Question 5

If a firm is currently in a short-run equilibrium earning a profit, what impact will…

1. a lump-sum tax
2. an increase in variable factor prices

…have on its production decision?

Answer 5

1. MC unchanged; output says same bc MC=MR still; profit reduced -> same quantity producing still
2. VC and MC changed; TC increase; output level decrease bc new MC curve intersects the MR at lower Qty; may need to increase price (if pricing power) or reduce output

Question 6

If resale is easy, then
A) price discrimination won’t work, because then only low-priced goods are sold.
B) consumers’ demand curves will shift to the low-priced good.
C) firms will stop providing the good.
D) price discrimination results in lower consumer surplus.

Answer 6

A

Question 7

When a firm has a monopoly in a market and also perfectly price discriminates, total welfare…..

Answer 7

• is mazimized
• same as in perfectly competitive market but only distributed differently

Question 8

Which of the following is an example for group price discrimination?
A) a BMW selling for more than a VW
B) local residents receiving a discount at the local golf course
C) the fact that a razor is cheap and blades are expensive
D) a hotel charging more for a room if the customers bring pets.

Answer 8

B

Question 9

11)Purchasing a season pass to the local symphony
A) is an example of first degree price discrimination.
B) is an example of second degree price discrimination.
C) is an example of third degree price discrimination.
D) is an example of intertemporal price discrimination.

Answer 9

B! About quantity!

Question 10

With two-part pricing, a firm
A) charges a lump-sum fee that gives the consumer the right to buy a good or service.
B) must have market power.
C) must be able to prevent resale.
D) All of the above

Answer 10

D

Question 11

If reservation prices are positively correlated, then
A) pure bundling cannot increase a firm’s profit.
B) pure bundling can increase a firm’s profit.
C) it is unclear whether or not pure bundling can
increase a firm’s profit.
D) consumers lose leverage over firms.

Answer 11

A

Question 12

Which of the following is an example of mixed
bundling?
A) a suit jacket
B) dinner at a buffet restaurant
C) a desktop computer and monitor
D) All of the above.

Answer 12

C

-> offering seperately and together

Question 13

Which of the following is an example of
peak-load pricing?
A) Charging less for vacations to Hawaii
during December and January
B) Charging more for electricity on hot
days
C) Setting price equal to marginal cost
when there is a capacity constraint
D) Selling excess capacity at lower
prices

Answer 13

B

-> peak load pricing: charging more when there is more demand

Question 14

Explain for each example below which type of price discrimination is given.

1. You can buy several products together at a lower price than you would pay
   in total for all these products separately.
2. You pay each month 0,01€ for each minute of your calls and 5€ on top.
3. Booking hotel rooms for the summer costs more than for the winter.
4. Booking hotel rooms only 1 day in advance costs less than half a year in advance.
5. A cinema has different prices for children, students and adults.
6. Buy one for 2€ or pay 1€ more and get an additional one.
7. In an auction each of the highest bidders pays his/her chosen price.

Answer 14

1. bundling
2. two part pricing
3. peak load pricing /seasonal
4. third degree /second degree
5. third degree
6. SECOND DEGREE
7. FIRST DEGREE

Question 15

In the simplest version of the Cournot model, we assume
A) the firms set price independently and simultaneously.
B) the firms set price independently and sequentially.
C) that the firms have identical costs.
D) the firms are in a Nash equilibrium.

Answer 15

C identical costs

Question 16

In a Bertrand model with identical products
A) price is set above marginal cost.
B) marginal revenue is above marginal cost.
C) price is equal to marginal cost.
D) None of the above.

Answer 16

C

Question 17

One criticism of the Bertrand pricing model is that
A) the model is implausible when there is product differentiation.
B) when there is an oligopoly with no product differentiation, the model’s prediction is inconsistent
with reality.
C) the model’s predicted price is solely a function of demand conditions.
D) the model’s predicted price is dependent on the number of firms.

Answer 17

B, because in reality, many firms are able to sustain P>MC due to facors like capacity constraints, collusion or other market imperfections

Question 18

An example of a market where a Bertrand model would be plausible is the market for
A) oil.
B) wheat.
C) beer.
D) sugar

Answer 18

D, bc
- competing by setting prices, products are homogenous

Question 19

“Cheap talk” is considered cheap because
A) communications via phone or email these days has a cost that is close to zero.
B) a firm can say anything, but may actually do something different.
C) the cost of talking is far outweighed by the gains to be made in coordinating efforts.
D) firms avoid the costs of hiring lawyers.

Answer 19

B

Question 20

A dynamic game is a game
A) in which the players are highly animated.
B) that is sequential or repeated.
C) where the payoffs change frequently.
D) that has actions instead of strategies.

Answer 20

B, that is sequential or repeated. (making decisions at different points in time)
<-> static game: all decisions made at once

Question 21

In a tit-for-tat strategy, a player
A) randomly punishes its rival.
B) ensures that the joint profit is maximized in each round.
C) copies the action of its rival’s prior move in the subsequent rounds.
D) maximizes the joint profit in the game.

Answer 21

C -> if opponent cooperate, you coopertae. if they defect, you defect

Question 22

If firms adopt a strategy that triggers a permanent punishment, the result in an indefinitely
repeated game is
A) undefined.
B) the non-cooperative Nash equilibrium.
C) the collusive Nash equilibrium.
D) economically inefficient.

Answer 22

C -> can sustain collusive outcome; threat of permanent punishment makes collusion equilibirum because the short term gains from deviating are outweighed by the long term losses from the punishment

Question 23

) The Cournot and Stackelberg models are similar, EXCEPT Cournot ________ and Stackelberg
________.
A) sets price; sets output
B) sets output; sets price
C) is dynamic; is static
D) is static; is dynamic

Answer 23

D

Question 24

Deterring entry might require a firm to
A) price their product closer to the competitive price than to the monopoly price.
B) price their product closer to the monopoly price than to the competitive price.
C) drop output almost to zero to show the consumers “who’s boss.”
D) drop price almost

Answer 24

A -> makes market less attractive for new firms

Question 25

An incumbent firm uses limit pricing…
A) to set price below a potential rival’s marginal cost, thus making entry unprofitable.
B) to set one price for a quantity of a good below a certain limit, and a second price for purchases
above the limit.
C) when it has no other advantages over a potential rival.
D) if it is limited in the quantity of inputs it can purchase to produce output.

Answer 25

A -> Limit Pricing means setting the P low enough to make it unprofitable for potential rivals to enter the market. P<MC and the rival cannot cover its cost

Question 26

An incumbent monopolist producing more output than necessary might be able to keep potential
rivals from entering
A) by flooding the market with products below its marginal cost in the short run.
B) if learning by doing reduces marginal cost.
C) if the long-run marginal cost can be lowered below the potential entrant’s short-run marginal
cost.
D) All of the above

Answer 26

D
- create short term losses by flooding
- learning by doing -> producing at lower cost over time
- lowering long run MC; producing more efficiently than new entrants

Question 27

An auction in which the price announced by the auctioneer DESCENDS is called a(n)
A) Dutch Auction.
B) English Auction.
C) Sealed Bid Auction.
D) Descending Option Auction.

Answer 27

DUTCH AUCTION

Question 28

The individual with the highest valuation of the good will win in which of the following auctions?
A) English Auction
B) Dutch Auction
C) Sealed Bid Auction
D) All of the above.

Answer 28

D

Question 29

The winner’s curse occurs when
A) bidders “shade” their bids.
B) the winning bid is higher than the good’s common value.
C) the winner buys something he didn’t need.
D) the winning bid is higher than the private value of the good.

Answer 29

B -> Is about the COMMON value (private = you have your own valuation of the good anyway)