The George Washington University
Department of Economics
Microeconomics XXXXXXXXXXTake-Home Final Exam 12/11/2019
THIS TAKE-HOME EXAM IS DUE 8AM 12/16/2019. Hard copies are to be handed in at
the beginning of the in-class final exam. Please make sure that your work is handed in on
numbered pages that are in order. Please staple or paperclip loose pages. Good Luck!
Short Answer Questions 20 Points. Choose only 4 questions. If you answer all 5, only
questions 1-4 will be graded (5 points each question)
1) True or false: Because the Cournot equili
ium is a cooperative solution, it explains why
prices are higher in markets with fewer firms. Explain your answer.
2) During the annual holiday season, two popular ice cream
ands, Turkey Hill and
Breyers, offer promotional pricing on their ice cream
ands to supermarkets, who then
pass these discounts on to consumers. Promotional pricing boosts sales at the end of the
year. Each firm must decide whether to offer promotional pricing for Thanksgiving or fo
Christmas. Neither can afford to offer promotional pricing for both holidays. The payoff
matrix for Breyers and Turkey Hill is below:
Turkey Hill
Thanksgiving Christmas
Breyers Thanksgiving 10, 10 4, 12
Christmas 12, 4 6, 6
a) What is the game’s Nash equili
ium?
) Explain why this solution is a Nash equili
ium.
3) The inverse demand for flu vaccinations is given by P = 1,500 – 0.5Q while the inverse
supply is given by P = 300 + Q. The vaccine is generating external marginal benefits
equal to $1,000 at every price level because it reduces the spread of the flu. Graph this
information. Based on the information, do vaccinations generate a negative or positive
externality? Identify any deadweight loss.
4) Cu
ently, the Federal Government subsidizes the metro rides of all Federal employees.
The subsidies enable employees to commute at a substantial discount. The result has
een a significant increase in metro rides since the program started. True or false: A
subsidy only helps government employees reduce their commuting costs, and really does
nothing for the rest of society. Explain your answer using a diagram.
5) Suppose the 10th floor residents of John Jay dormitory are throwing an all-night floor
party for the 10
th
floor residents and their invited guests. There are no restrictions on
floor parties at the University. However, the bass and continuous dancing are keeping the
ninth-floor residents awake, and they just want a good night’s sleep. After numerous
phone calls between the Floor Reps, the Reps decide to each send an Econ student to
work out a solution that both floors would accept. Each Econ student surveyed her
floormates and knows how much each resident of her floor is willing to pay to continue
(or shut down) the party.
a) Can the Econ students find an optimal solution that doesn’t involve the
campus police? Explain.
) Using your answer above, put together your own numerical example,
where the optimal solution is for the 10
th
floor to party all night.
Longer Problems: 30 Points (2 points each sub-question). Write your answers and show
your work.
1. Assume the market for smart phones is a duopoly consisting of two firms--Pear and
Dusung.
Market Demand is , where is thousands of phones per month.
Each of the firms has identical total cost curves. The total cost curve of each duopolist is
, where is thousands of phones per month.
Suppose the two firms collude through sharing all information and holding monthly lunch
meetings:
a) Calculate the profit maximizing price, output per month and the co
esponding profit
for each firm.
) If the phones were sold at the competitive price, what would be the price and quantity
sold.
c) Explain, using a diagram and/or equation, that despite the solid cooperation, each
firm still has the incentive to cheat on the collusive agreement.
Suppose the collusive agreement is declared illegal, and the firms can not cooperate.
They change behavior and each chooses the best output level given the output of the
competition. The Cournot model best describes their behavior.
d) What are reaction functions of each firm? Explain.
e) Find the Cournot equili
ium and show with a graph.
f) What is the profit maximizing output and price for each firm at the Cournot
equili
ium?
g) Calculate the total surplus. Show, using a diagram.
h) Explain using your calculations of surplus, why each type of firm behavior—
collusion, competition, Cournot duopoly-- has a different impact on the well-being of
society.
2. Suppose a monopsonist in the mining industry faces the following the labor demand and
supply curves:
Labor Demand is , where W is the annual wage and is the
number of workers hired. Labor supply is , where is the number
of workers willing to work at the wage W.
a) Calculate the marginal expenditure equation the monopsonist faces.
) Determine the optimal number of workers the monopsonist hires and the wage paid.
c) What would be the competitive wage and employment level in this market?
d) Calculate the deadweight loss resulting from the monopsonist’s wage and
employment decision.
e) Suppose the government sets a minimum wage that is $15,000 per year per worker.
How does this wage impact the monopsonist’s decision? Explain, by using a diagram
to show how this impacts the monopsonist’s marginal expenditure curve.
f) Suppose the government raises the minimum wage to $21,000. How does this wage
impact the monopsonists decision? Explain by using a diagram to show how this
impacts the monopsonist’s marginal expenditure curve
g) How might this model help you to argue that a minimum wage could be beneficial to
society?