PRICES AND MARKETS Core Course PUSHAN DUTT Date: 5th March, 2007 Time: 9am – 12noon
Duration of the exam: 3 hours Closed-book exam (two A4 sheets allowed). You may NOT use a computer or a PDA Your answers must be in English Write all answers in a separate booklet, not on this question paper. At the end of the exam you can find blank pages as “scratch paper” for calculations. This exam is worth 200 points (you get an endowment of 5 points for showing up) and you have 3 hours to complete the test. Point values of each question are noted in each section or beside the question. Questions are not equally valuable so time management is important! Answer ALL questions. Partial credit will be given for partially correct answers. However, points may be deducted for incorrect statements or illegible (difficult to read) answers. To obtain partial credit, show your work. Good Luck!
In case of doubt on an exam question, participants will state their assumptions on the exam paper. Professors are not allowed to answer questions from the amphitheatres.
Part I: Multiple Choice (Do NOT answer the questions on the question paper). Each question is worth 6 points.
Q 500 1. The figure above shows the demand curve for crude oil. If the market price is $20 a barrel, what is the price elasticity of demand? a. 4 b. 0.2 c. 5 d. 0.25 2. Which of the following conditions must hold in an equilibrium of a competitive market where the government imposes a per-unit tax on a good? a. The quantity sold and the price paid by the buyers must lie on the demand curve. b. The quantity sold and the price received by the sellers must lie on the supply curve. c. The difference between the price the buyers pay and the price the sellers receive must equal the tax. d. All of the above 3. Which of the following pairs is most likely to be an example of substitute goods? a. Laptop computers and Desktop computers b. Computers and Software c. Computers and Telephones d. Computers and Wireless Networks 4. An executive is asked how he prices. She responds, “Well, I price my product at $100. I know that if I halve my price, my demand doubles.” If the executive is pricing optimally according to the markup formula, what are the marginal costs? a. $20 b. $30 c. $50 d. None of the above ________________________________________________________________________ Prices & Markets final -2-
Answer questions 5 and 6 using the following information Ryan Air has a marginal cost of 40 (constant) and faces a demand curve for airline tickets from Rome to London given by d(P) = 480 – 0.5P. 5. The optimal ticket price on the Rome-London leg is: a. 480 b. 500 c. 960 d. 40 6. Assume that now demand doubles due to a Champions League final being held in London. Its optimal price will now be a. 480 b. 500 c. 960 d. 1000 7. A monopolist using inter-temporal price discrimination will: a. set a lower price at all times than a monopolist selling at a single price; b. set a higher price at all times than a monopolist selling at a single price; c. start with a higher price and subsequently lower price over time compared to a monopolist selling at a single price. d. start with a lower price and subsequently raise price over time compared to a monopolist selling at a single price. 8. A pharmaceutical firm sells a patent drug in Vermont (USA) and Montreal (Canada). It produces the drug with constant marginal cost in a plant in Switzerland and transportation costs for delivering the drug to Vermont and Montreal are the same. The drug sells for 30 in Vermont and 20 in Montreal (prices in $US). Recent estimates have shown that the elasticity of demand is 3 for the US market and 5 for the Canadian one. a. Since we do not know what the marginal cost is, we cannot tell whether the firm is maximizing profits. b. The firm is maximizing revenues. c. The firm can increase its profits by charging a slightly higher price in Vermont. d. The firm...