Question

Answer the following and state your reasoning for each answer.

1) If marginal cost is constant, what happens to a market if it evolves from perfect competition to monopoly without any change in the position of the market demand curve or any change in costs?

A consumer surplus increases, producer surplus increases, and deadweight loss is not created.

B consumer surplus decreases, producer surplus decreases, and deadweight loss is created.

C consumer surplus increases, producer surplus decreases, and deadweight loss is not created.

D consumer surplus decreases, producer surplus increases, and deadweight loss is created.

2) Suppose you and your best friend are deciding whether to spend the weekend in Key West or to stay home and study for next week’s exam. The game table is shown below. Which of the following is the Nash equilibrium?

		Friend
		Travel	Study
You	Travel	8560	7570
	Study	8060	7080

A You and your friend both travel.

B You travel but your friend studies.

C You study but your friend travels.

D You and your friend both study

3) Consider a profit-maximizing monopoly pricing under the following conditions. The profit-maximizing price charged for goods produced is $12. The intersection of the MR and MC curves occurs where output is 10 units and marginal cost is $6. The socially efficient level of production is 12 units. The demand curve and marginal cost curves are linear. What is the deadweight loss?

A $4

B $6

C $12

D $16

4) When perfectly competitive firm X sells three units of product Z, its marginal revenue is $4.67. When it sells 100 units, marginal revenue is $4.67. We can conclude that the price:

A is dropping.

B is $4.67.

C is too high.

D is not equal to average revenue

5) Regardless of what Clyde does, if Bonnie can minimize her jail sentence by ratting on Clyde, then ratting would be considered a:

A trembling hand strategy.

B tit-for-tat strategy.

C dominant strategy.

D Nash equilibrium strategy.

Answer 1

1) The correct answer is (D) i.e consumer surplus decreases , producer surplus increases and deadweight loss is created. This is because the perfectly competitive price is not equal to the monopoly price.

2) The Nash equilibrium is (A) me and my friend both travel. This is also the dominant strategy.

3) The correct answer is (B) i.e deadweight loss is $6.

4) The correct answer is (A) Trembling hand strategy. Trembling hand strategy is one where the players may choose unintended strategies, although the possibility may be small.