Columbia University

2019–2020

UN3211

Intermediate Microeconomics
—
Practice Final Exam I

Instructor: Wouter Vergote

FALL 2019

Instructions:
+ Please write all your answers on the space available on the exam.
+ Write your name on the front of each page of the exam.
+ The exam is closed book. You have 2 hours to complete the exam.
+ Cell phones and headphones are not permitted.
+ You can use a calculator without storage capacity (a simple calculator).
+ There are 12 pages to this exam.
+ Make sure to write all your answers inside of the provided box. Ask for scratch paper to draft
your answer if necessary.
+ Please make sure you have the correct number of pages and do not detach any of page of your exam.
+ Total exam points: 100.
+ GOOD LUCK!

Name and UNI:

Question Points Score

1 20
2 12
3 24
4 20
5 24
Total: 100
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Question 1: Multiple Choice (20 points)

Please carefully read the following 4 multiple choice questions. For each question, there is only one
answer which is (most) correct.

(a) A goverment subsidy

A. usually leads to dead weight loss in competitive markets but can improve welfare
in oligopolistic markets.
B. usually leads to dead weight loss in competitive markets and can never improve
welfare in oligopolistic markets.
C. usually increases welfare in competitive markets but not necessarily in oligopolistic
markets.
D. usually increases welfare in competitive markets and in oligopolistic markets.

(b) The Bertrand Paradox

A. refers to the idea that when a firm moves last in quantity competition it will obtain
lower profits even if it can observe the previously taken action of the other firm.
B. describes a situation in which two identical firms compete in prices and reach a
Nash equilibrium where both firms charge a price equal to marginal cost.
C. refers to Bertrand Russell’s paradox in mathematics that some attempted formal-
izations of the naïve set theory created by Georg Cantor led to a contradiction.
D. refers to none of the above

(c) A $5 per unit subsidy is paid to shampoo makers operating in a competitive market. The
equilibrium after the subsidy is introduced is such that the price consumers pay decreased by
$3 (compared to the pre-subsidy level of the consumer price). Moreover, the quantity traded
in the market increased from 43 to 63. If demand and supply are linear then the deadweight
loss of this subsidy is:
A. $100
B. $60
C. $50
D. $30

(d) A firm faces the demand curve Q = 25P −2 , where Q is quantity demanded, P is price and
P −2 means P to the power minus two. Which of the following is true?
A. Setting the price to $25 maximizes the firm’s revenue.
B. The firm can always increase revenue by increasing its price.
C. The firm can always increase revenue by decreasing its price.
D. Any price maximizes the revenue of the firm.
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Question 2 (12 points)

Concisely explain the following two concepts:
(a) (6 points) A Dutch Auction

(b) (6 points) Tax Incidence

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Question 3 (24 points)

Monopoly and Duopoly. Consider a monopoly (firm A) which produces and sells gadgets. The
firm has been around for a long time, implying it has no fixed cost for the production. The inverse
market demand function is: P = 14 − Q, where P is the price of gadgets, Q is total supply. Firm
A’s marginal (and average-) cost for producing gadgets is 2.
(a) (2 points) Write Firm A’s profit function

(b) (4 points) What is the profit-maximizing quantity of gadgets that Firm A produces? Which
price does it charge for gadgets?

(c) (2 points) Calculate firm A’s profit.

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(d) (8 points) Suppose now that a firm B considers entering the market. If it enters, the two
firms decide about production volumes simultaneously. Firm B has the same marginal cost
as firm A but it also has a fixed cost F = 17 to set up a production plant if it decides to enter.
Find the equilibrium price and equilibrium quantities if firm B enters the market. Calculate
the profits of firm A and firm B. Would firm B want to enter the market?
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(e) (8 points) Suppose again that firm B considers entering the market but now, if it enters,
the production volumes are not decided simultaneously. Instead firm B has the opportunity
to decide first and Firm A decides its production volume knowing and observing Firm B’s
production volume. As in the previous subquestion, firm B has the same marginal cost as
firm A but it also has a fixed cost F = 17 to set up a production plant if it decides to enter.
Find the production volumes the two firms will produce in equilibrium. Find the profits of
the two firms. What do you conclude about entry now?
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Question 4 (20 points)

You own an aluminum smelter and aluminum smelting is a perfectly competitive industry. Your
total variable costs are given by
T V C = 2Q2 + Q
where Q is aluminum output per year and T V C is dollars per year. Your total fixed costs are 32
dollars per year, all of which is sunk in the short-run.
(a) (5 points) What is the price below which you will temporarily suspend operations in the
short-run?

(b) (5 points) What is your short-run supply function?

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(c) (10 points) What is the price below which you will go out of business in the long-run? Ex-
plain carefully and illustrate graphically.
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Question 5 (24 points)

Third degree price discrimination. Suppose that Acme Pharmaceutical Company discovers
a drug that cures the common cold. Acme has plants in both the United States and Europe and
can manufacture the drug on either continent at a marginal cost of 10. Assume there are no fixed
costs. In Europe, the demand for the drug is QE = 70 − PE , where QE is the quantity demanded
when the price in Europe is PE . In the United States, the demand for the drug is QU = 110 − PU ,
where QU is the quantity demanded when the price in the United States is PU .
(a) (6 points) Suppose Acme Pharmaceutical Company can price discriminate between con-
sumers on both continents, what price should it set on each continent to maximize its profit?
Obtain total profits
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(b) (6 points) Assume now that it is illegal for the firm to price discriminate, so that it can
charge only a single price P on both continents. What price will it charge, and what profits
will it earn? Will the firm sell the drug on both continents?
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(c) (6 points) Will the total consumer and producer surplus in the world be higher with price
discrimination or without price discrimination?
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(d) (6 points) Now consider the following change. Suppose the demand for the drug in Europe
declines to QE = 30−PE . If the firm cannot price discriminate, will it be in the firm’s interest
to sell on both continents? Will the total consumer and producer surplus in the world be
higher with price discrimination or without price discrimination?

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