Other Economics Answers

1) Suppose that the demand function of an industry can be described by Q(P) = 1500-

3P. Assume there are two firms with cost function C(g) = 20g.

(a) Determine the equilibrium outcome and profits when firms set quantities sequentially

as in the Stackelberg model. Assume that firm 1 is the leader.

(b) Assume firm 1 is the incumbent in a monopoly market and firm 2 a potential entrant.

Entry implies a fixed cost of F = 300. Can entry be deterred? Will the incumbent firm deter

entry?

(c) Suppose entry implies a fixed cost of F = 30000. Will the incumbent firm deter

entry?

(d) What would firm 1 do if there were no threat of entry? What does this mean for the

incumbent's strategy in part (C)?

In a perfectly competitive industry, the market price is R20. An individual firm produces output at which MC = R25. What should the firm do to maximise profits or to minimise losses in the short run?

•  A. they should shut down.
•  B. they should increase production.
•  C. they should decrease production.
•  D. they should leave the output unchanged

If a perfectly competitive firm’s marginal cost is greater than its marginal revenue at its current level of production, what must the firm do to increase its profit?

A. Increase its output.

B. Decrease its output.

C. Increase the price of its product.

D. Reduce the price of its product.

Consider the following voting game. There are three players, 1, 2 and 3. And there are three alternatives: A, B and C. Players vote simultaneously for an alternative. Abstaining is not allowed. Thus, the strategy space for each player is {A, B, C}. The alternative with the most votes wins. If no alternative receives a majority, then alternative A is selected. Denote ui(d) the utility obtained by player i if alternave d E {A, B, C} is selected. The payoff functions are,

u1 (A) = u2 (B) = u3 (C) = 2

u1 (B) = u2 (C) = u3 (A) = 1

u1(C) = u2 (A) = u3 (B) = 0

a. Let us denote by (i, j, k) a profile of pure strategies where player 1’s strategy is (to vote for) i, player 2’s strategy is j and player 3’s strategy is k. Show that the pure strategy profiles (A,A,A) and (A,B,A) are both Nash equilibria.

b. Is (A,A,B) a Nash equilibrium? Comment.

Suppose there is a covered bowl with 3 red balls and 6 other balls, which could be black or yellow. The Decision Maker [DM] doesn’t know how many black or yellow balls there are, other than there are 6 in total. The DM will choose one ball from the bowl; each ball is equally likely to be chosen. The DM is offered a choice between Option A, which pays off LKR1000 if a red ball is drawn (0 otherwise) or Option B, which pays off LKR1000 if a black ball is drawn (0 otherwise). The DM says she prefers A to B. The DM is then offered a choice between Option C, which pays off LKR1000 if a red or yellow ball is drawn (0 otherwise), or option D, which pays off LKR1000 if a black or yellow ball is drawn (0 otherwise). The DM says she prefers D to C. Argue that these preferences are not consistent with the things you learned about decision making under uncertainty and the basics of the theory of expected utility.

The RESERVE BANK can increase the money supply in the market by:

Select one:

a. buying government securities

b. none of the given options

c. borrowing money from commercial banks

d. selling government securities

The relationship between the change of real output and the unemployment rate in the US economy was examined by Arthur M. Okun (1928-1980). How was the theory of business cycle placing an important position in his work? Elaborate.

1 . Explain whether each of the following events shifts the short-run aggregate supply curve, the aggregate demand curve, both or neither. For each event that does shift a curve, draw a diagram to illustrate the effect on the economy.

a. Households decide to save a larger share of their income.

b. Sri Lankan farmers suffer a prolonged period of unfavorable weather conditions for agriculture.

c. Increased job opportunities overseas cause many people to leave the country.