1.

On a hot day, are you willing to pay more than you normally would for an ice-cold can
of Coke? If so, you are the type of consumer Coca-Cola Company had in mind when it
developed a high-tech vending machine, complete with heat sensors and microchips, that
charges a higher price when the weather is hot. The price discriminating scheme used by
Coca-Cola in this case assumes that consumers have different demand elasticities for
Coca-Cola. In particular:

a. the demand for Coca-Cola becomes more elastic as the temperature rises.

b. the demand for Coca-Cola becomes more inelastic as the temperature rises.

c. the demand for Coca-Cola is unitary elastic regardless of the temperatrure.

d. as the temperature rises, demand becomes perfectly elastic.

2. The city of Kozhikode is thinking of expanding the airport. The expansion will
increase travelers consumers surplus by Rupees 100,000 and airlines producers
surplus by Rupees 200,000, while costing taxpayers only Rupees 50,000. However the
extended airport will be much noisier. This increased noise would reduce the house price
by Rupees 10,000 each for each of the 30 neighbours (and therefore impose a cost of the
same magnitude on them). Can you tell whether the expansion would improve social
welfare?

a. The expansion will improve the social welfare.

b. The expansion will adversely affect the social welfare.

c. The expansion will not change the social welfare in one direction or the other.

d. It cannot be determined from the information provided.

3. Golden Balls is a British game show where players decide, in secret, whether to adopt
a strategy of Split or Steal. In this episode, they face the following payoffs (in British
pounds):
Abrahams Strategy

Split Steal

0 for Nick
Split 6,800 each
13,600 for Abraham

Nicks Strategy
0 for Abraham
Steal 0 each
13,600 for Nick

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 How many Nash equilibriums are there?
a. 0

b. 1

c. 2

d. 3

4. You are disturbed by the loud music played by your neighbor. The law gives you
a clear right not to be disturbed. Being able to play the music is worth Rupees 100 to
your neighbor and not being disturbed is worth Rupees 50 to you. If the two of you
could arrive costlessly at a private bargain, it would involve:

a. The neighbor playing music and making a payment to you.

b. The neighbor not playing music and receiving a payment from you.

c. The neighbor not playing music and not making or receiving any payment.

d. No bargain that is acceptable to both of you is possible.

5. Which of the following is true?

a. Majority-rule voting based outcome is efficient.

b. Common property resources such as fisheries are under-used.

c. In case of a negative extenality, marginal social benefit is less than marginal

private cost at market level outcome.

d. Efficiency of market solution has nothing to do with which party is favoured by

the property rights.

6. There is statistical evidence that the price elasticity of demand for Royal Crown cola is
-2.4, and the price elasticity of demand for Coke is roughly -5.5. Which firm likely has
stronger brand loyalty among customers that provides greater potential for monopoly
power in the cola market?

a. Both firms should have identical monopoly power

b. Coke

c. Royal Crown

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 d. We do not have enough information to answer this question.

7. Engineers at Jalopy Automotive have discovered a safety flaw in their new model car.
It would cost $500 per car to fix the flaw, and 10,000 cars have been sold. The company
works out the following possible scenarios for what might happen if the car is not fixed,
and assigns probabilities to those events:

Scenario Probability Cost

No one discovers flaw 0.15 $0

Government fines firm (no lawsuits) 0.40 $10 million

Resulting lawsuits are lost (no government fine) 0.30 $12 million

Resulting lawsuits are won (no government fine) 0.15 $2 million

Jalopy Automotive's executives,

a. if risk-loving, would fix the flaw because it enables them to have a sure outcome.

b. if risk-neutral, would fix the flaw because they prefer sure outcome to uncertain
events.

c. if risk-neutral, would fix the flaw because the cost of fixing the flaw is less than
the expected cost of not fixing it.

d. if risk-averse, would not fix the flaw because the cost of fixing the flaw is more
than the expected cost of not fixing it.

8. There are two kinds of cars in the market. Buyers and sellers are risk neutral. Sellers
know the quality of the car but buyers are not aware of the same.

Low Quality High Quality

Value to Seller $1000 $2000

Value to buyers $1200 $2200

Proportion of cars 50% 50%

Which of the following is a possible price in the market?

a. $2100

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 b. $1700

c. $1500

d. $1100

9. Blanca would prefer a certain income of $18,000 to a gamble with a 0.5 probability of
$10,000 and a 0.5 probability of $30,000. Based on this information:

a. we can infer that Blanca is risk loving.

b. we can infer that Blanca is risk averse.

c. we can infer that Blanca neutral.

d. we cannot infer Blanca's risk preferences.

10. Let us meet for dinner at Sagar, Radha told Shyam. Only after putting down the
phone did she remember that there were two Sagar restaurants in Calicut: one near the
Mofussil Bus Stand and the other near the KSRTC Bus Stand. But now Shyam's phone is
unreachable. Meanwhile, Shyam too has realized the problem with there being two
Sagars. But he cannot reach Radha either. They must now decide which Sagar to go to
without communicating with each other. Both strictly prefer having dinner together to
eating alone and both prefer eating together at the Sagar near the KSRTC Bus Stand to
eating together at the Sagar near the Mofussil Bus Stand.

Model this situation as a simultaneous game and find Nash equilibrium (equilibria) for
the game.

11. A fisherman at Hardin Lake can catch 20 fish per day, provided he has the lake to
himself. Two fishermen can catch 19 fish apiece per day, and three can catch 18 fish
apiece per day. Other numbers are given by the table:

Number of Fish per Day per

Fishermen Fishermen

1 20
2 19
3 18
4 17
5 14
6 13
7 10
8 7
9 5

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The opportunity cost of a day at the lake is 7 fish (i.e. the alternative activity is as
valuable as 7 fish).

a. If there is no entry restriction, how many fishermen will come to the lake? What is
the social gain from the existence of the lake?

b. From the point of view of maximization of social gains, what is the optimal number
of fishermen at the lake? What is the social gain if this optimal is achieved?

c. Suppose a social planner can impose an entrance fee to conduct fishing in the lake for
maximizing social gains. What entrance fee leads to the optimal outcome?

12. In the nation of Utopinia, a revolution is taking place. Before the start of the
revolution, Mr. Jones is the premier of the nation on Nov. 5. The angry mobs surround
his palace in anticipation of arrival of three great leaders, Old Major, Napoleon and
Snowball; who are to reach the palace of the premier on Nov. 6, 7 and 8th, respectively.
On arrival, a leader can direct the bloodthirsty mob to lynch the exiting premier and
become the premier of the nation himself. However a leader can also pacify the angry
mob and thereby extend his support for the existing premier. Once the mob is pacified,
the revolution stops and subsequently, all leaders cancel their trips to the capital. Each
leader values being alive more to death. Moreover, he wants to be the premier of the
nation than not.

a. Is this a sequential game or a one shot game?

b. Identify the players in this game?

c. State the strategies available to each of the players.

d. Identify the possible outcomes for each player in this game.

e. Model a game for this situation with appropriate pay-offs specified.

f. Who is the premier of the nation on Nov. 9?

13. Monica has undergone a unique experience with a public figure, Bill. The public
wants to know about this experience and there is a huge demand for it. Monica is a
monopoly in this market to narrate her experience. Monica can accept offers to write her
memoirs. Suppose, a publisher buys the copyright of Monica's memoirs. The publisher
faces different demands from the domestic and the international markets. The demand
curves for the international and the domestic market are respectively given as,

Qint = 800- 40 Pint

and, Qdom = 1,050 - 10 Pdom

The publishing house has to offer Monica a sum of 5,000 dollars to purchase the
copyright of exclusively selling the memoirs. Additionally the cost for selling Q number

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of copies of the memoirs is given by 5Q dollars. Indeed, the price could differ between
domestic and international markets.

a. Find the equilibrium price in the domestic market.

b. Find the number of books sold in the domestic market.

c. Find the equilibrium price in the international market.

d. Find the number of books sold in the international market.

e. Find the total profit of the publishing house.

14. Drake Duck is a typical first-year student. His probability of landing a summer job at
an investment bank is 0.81. His utility function, used for calculating expected utility,
certainty equivalents, is
U(x) = x2
where x is the eaarning in the summer that is $100 if he receives the job, zeo otherwise.
What is the certainty equivalent and risk premium of Drake from the lottery of finding
the job?

15. Suppose that only two firms produce widgets. The cost functions of the firms are
given by C(Q1) = 0 and C(Q2) = 6 Q2; Q1 and Q2 are quantities supplied by firms 1 and
2. The demand curve for widgets are given by P = 30 Q1 Q2. Each firm maximizes
its profit
a. Find the Cournot-Nash equilibrium level of output in the market.

b. Now, consider a different business environment where firm 2 sets its output
choice before firm 1 does so and firm 1 decides on its output after knowing firm
2s choice. Find the (Stackelberg) equilibrium output choices for both firms.