1. A single-price monopolists marginal cost is Rs.

10 per unit of output for all levels of

the output. If the monopolists optimal price is increased by 1%, then the quantity
demanded falls by 3%. What price would the monopolist charge to maximize profit?
a.

Rs. 15

b.

Rs. 6.67

c.

Rs. 20

d.

Rs. 30

2. Study the monopoly from the figure below:

What is the deadweight loss in case of this monopoly?

a. Between 0 and 50.
b. Between 50 and 100.
c. Between 100 and 200.

a. None of the above

3. A steel factory is dumping effluence in a river, which affects the fishermen. It is the
factory's choice whether to install a filter. It is the choice of the nearby fishermen whether
to install a treatment plant. Dollar figures show profit. The factory and the fishermen can
negotiate costlessly, and no one else is affected by the result.
Factory

Fishermen

A: No filter or treatment plant

$10,000

$2,000

B: Filter; no treatment plant

$6,000

$10,000

C: No filter; treatment plant

$10,000

$4,000

D: Filter; treatment plant

$6,000

$6,000

The law permits the steel factory to dump the effluence in the river.
It would be acceptable to both parties to have the fishermen pay the factory
a. $0 to install a filter.
b. $3,500 to install a filter.
c. $5,500 to install a filter.
d. $7,500 to install a filter.
4. Which of the following is a public good?
a. The Red Cross
b. Telephone service
c. Broadcast TV
d. A daily newspaper
5. Study the following simultaneous game, played between the row player and the
column player:
UP
DOWN

LEFT
2, 3
2, 1

How many Nash equilibrium(s) are present in this game?

RIGHT
3, 3
3, 1

a. 0
b. 1
c. 2
d. 3 or more
6. Consider a market in which high-quality and low-quality television sets are sold.
Before consumers make a purchase, they do not know the quality of the sets, but the
sellers do know. As compared to a situation where both consumers and sellers know the
quality of the sets, this situation would
a. cause the average price of goods sold to rise.
b. increase the fraction of low-quality sets sold.
c. increase the fraction of high-quality sets sold.
d. cause no change in the ratio of low to high-quality sets sold.
7. When the movie "Jurassic Park" debuted in Westwood, California, the price of tickets
was $7.50. After several months the ticket price had fallen to $4.00. This is an example
of
a. peak-load pricing.
b. second-degree price discrimination.
c. a two-part tariff.
d. none of the above.
8. In case there exists positive externality for a good, marginal social benefit at a
particular quantity is _____its private marginal benefit.
a. Greater than
b. Less than
c. Same as
d. Equal to

9. Dry cleaning of clothing produces air pollutants. Therefore, in the market for dry
cleaning services, the equilibrium price
a. is too high to be optimal, and equilibrium quantity is too low.
b. and output are too high to be optimal.
c. and output are too low to be optimal.
d. is too low to be optimal, and equilibrium quantity is too high.
10. The famous recording artist Bono has a contract that gives him 20% of all revenue
from his recordings. The studio that issues those recordings charges $16 for a Bono CD.
But Bono has denounced his own studio for excessive greed and says hed like to see the
price come down to $10. Does this mean that Bono (or any other musician for that
matter) care more about their fans than producers do? View this from an economic point
of view and construct a story to see why Bono may feel like bringing down the prices.
Clearly present your precise arguments with suitable illustration.
[Hint: Bono/his studio is a monopoly among his music fans.]
11. Suppose that two identical firms produce umbrellas and they are the only firms in the
market. Their cost functions are given by C1 = 60 Q1 and C2 = 60 Q2, where Q1 is the
output of firm 1 and Q2 is the output of firm 2. Price is determined by the following
demand curve given by P = 300 Q, where Q = Q1 + Q2. Each firm maximizes its
profit.
a. Find the reaction function for the first firm in case of a quantity-competition.
b. Find the Cournot-Nash equilibrium level of output in the market.
c. If the two firms collude to form a cartel for maximization of profit with equal
stake, what is the level of output in the market?
d. The managers of the two firms realize that explicit agreements to collude are
illegal. Each firm must decide on its own whether to produce the Cournot quantity
(part b) or the cartel quantity (part c). To aid in making the decision, a manager in

one of the firms constructs a payoff matrix showing the profits of both the firms
under various possible circumstances.
Profit Payoff Matrix, with each cell

Firm 2

should be filled with (Profit of Firm 1,

Profit of Firm 2).

Produce Cournot

Produce Cartel

level of output

level of output

Produce Cournot
level of output
Firm 1
Produce Cartel
level of output

e. What is (are) the Nash equilibrium (equilibriums) in the above game (part d)?
Justify.
[Part e will be graded only if part d is correct.]
f. Now, consider a different business environment where firm 1 sets its output
choice before firm 2 does so and firm 2 decides on its output after knowing firm
1s choice. Find the equilibrium output choices for both firms.
12. The Superior Being (henceforth SB) has two strategies: One, to reveal Himself, only
which establishes His existence to mortals; and two, not to reveal Himself. Similarly, the
humble mortal Blaise Pascal (henceforth P) has two strategies: One, to believe in SB;
two, not to believe in SB. Let's assume that each player has a primary and a secondary
goal. SB's primary goal is for P to believe in His existence and His secondary goal is not
to reveal Himself. P's primary goal is to confirm his belief about SB's existence or nonexistence through some evidence, while P's secondary goal is to believe. (For P,
something is either true or false without any room for ambiguity. Therefore, not having
any evidence of existence is tantamount to non-existence).

The payoffs are determined by the fact that fulfillment of goals is valuable (nonfulfillment of goals may be standardized at zero, payoff wise) and fulfillment of the
primary goal is more valuable compared to fulfillment of the secondary goal.

a. Form a simultaneous game with the aforementioned players with appropriate

payoffs.
b. What is the outcome of the game.
[Part b will be graded only if part a is correct.]
13. Suppose that for Kate MBA, faces uncertainty regarding her placement. With a
probability of 1/3 each, she can land into three different categories of jobs with an annual
pay of rupees 0 lakh, rupees 3 lakh and rupees 80 lakh. Her utility function is given by

U(x) =(x+1), where x is her annual salary in lakhs of rupees, that is, a salary of
rupees three lakh means x =3.
a. What is the expected utility for Kate MBA?
b. What is the certainty equivalent of this gamble, namely placement, for Kate
MBA?
c. How would you describe Kates attitude toward risk?
d. Suppose an insurance company wants to insure Kate completely against the
placement risk. Would this insurance company make profit by offering Kate
MBA a sure income of rupees 24 lakhs in return for her salary after the
placement? Explain.
e. Would such an offer from the insurance company be acceptable to Kate? Why
or why not?

14. The country of Freedonia is considering producing either 0 or 1 units of national

defence, which is a public good. The country has three citizens A, B and C, whose
utilities for the two levels of national defence are given as follows:

UA(0) = UB(0) = UC(0) = 0

UA(1) = 0:1; UB(1) = 0:1; UC(1) = 2:9

These utilities are measured in rupee terms.

The cost of providing 0 units of national defence is Rs. 0 and the cost of providing 1 unit
of national defence is Rs. 3. If 1 unit of national defence is provided then it will be
financed by an equally distributed tax on the citizens. The citizens care about their
utilities net of taxes.

a. What is the efficient level of national defence for Freedonia.

b. If the citizens of Freedonia were to choose between 0 and 1 units of national

defence using majority voting, would they achieve an efficient outcome? Explain
carefully.