S1 2011 Sample Exam

Sample paper
Note: not 30 questions have been included here. Look at the on line Quizzes for revision questions.

PART A
This section is worth 30 marks
Answer all the questions in Part A on the answer sheet provided, using pencil only:

Question 1
Which of the following statements is true?
(a) A profit maximising monopolist will always set price and output at a level where demand is price elastic. X
(b) A profit maximising monopolist always produces where Average Revenue equals Average Cost
(c) A profit maximising monopolist will, in long run equilibrium, always use a scale of plant that minimises long run Average Costs. (d) A profit maximising monopolist will always produce where marginal cost is greater than price.

Question 2
Assume two rival car rental companies (Ace Rentals and Bob’s Rentals) are considering whether to discount their rates as a method of increasing market share.
The following pay-off matrix gives the expected monthly profits (in $’000) of each company (Ace, Bob’s) under alternate strategies: BOB’S Discount Do Not Discount Discount (12, 10) (24, 6)
ACE
Do Not Discount (8, 20) (16, 14)

(a) The Nash equilibrium is for neither firm to discount.
(b) The Nash equilibrium is for both firms to discount X
(c) The Nash equilibrium is for Ace to discount and Bob’s to not discount.
(d) The Nash equilibrium is for Bob’s to discount and Ace to not discount.

Question 3
Which of the following has the “non excludability” characteristic that defines a pure public good?
(a) A local council car park
(b) Suburban street lighting X
(c) A toll road
(d) School education

Question 4
A monopolist estimates that at the current price being charged for the product, marginal revenue is less than marginal cost, and price elasticity of demand is –1.4. To increase profit the monopolist should:
(a) Increase price and sell less X
(b) Increase price and sell more
(c) Decrease price and sell less
(d)