School of Economics, University of Sydney

ECON5026

PRACTICE MID SEM TEST – PART A (MCQ/FILL IN THE BLANK Q’S)

PART A

Multiple choice and Objective part

Question 1

Which of the following statements provide appropriate comparison of pricing under first

degree price discrimination and perfect competition when marginal cost is constant?

(a) Both competitive and first degree price discrimination entails Price= Marginal cost for

all goods sold.

(b) In perfectly competitive market the last unit of the good is sold at Price=Marginal cost

whereas in first degree price discrimination Price = Marginal cost for all goods sold.

(c) In perfectly competitive market Price= Marginal cost for all goods sold; whereas in

first degree price discrimination Price=Marginal cost for the last unit of the good sold.

(d) In both perfect competition and first degree price discrimination Price > Marginal cost

for all goods sold.

Question 2

Suppose that an investor can yield (X) three possible cash flows: $320, $200 or $40. The

probability of each outcome is 2/8, 5/8 and 1/8, respectively. What is the expected value

[E(X)] and standard deviation [SD(X)] of the investment?

(a) E(X) = 1800.23 and SD(X) = 1400

(b) E(X) = 210 and SD(X) = 81.853

(c) E(X) = 13027 and SD(X) = 156.934.

(d) E(X) = 184.8 and SD(X) = 114.138

Question 3

Which of the following statements is not correct?

(a) When dominant strategies do not exist, the concept of a Nash equilibrium is useful in

predicting the outcome.

(b) A dominant strategy exists when it is optimal for a firm to choose that strategy no

matter what its rival does.

(c) Coordination can prove more difficult in cases where precommitment communication

is costly and/or there are many players.

(d) In a mixed strategy Nash equilibrium, players do not randomise over pure strategies.

Question 4

Which of the following is not an example of transaction cost?

(a) Costs of learning product characteristics.

(b) Costs of hiring new employees.

(c) Costs of negotiating and drafting contract for sellers.

(d) Search costs for customers.

Question 5

Both Mercedes Benz and BMW, the two popular automobile manufacturing companies have recently

made a move to manufacture fully electric cars. Alternatively, they can just stick to their hybrid

models. Suppose they have the following payoff as they compete in the market,

Mercedes

BMW

Hybrid Fully Electric

Hybrid -100, -100 200, 0

Fully Electric 0, 150 0, 0

Which of the following options convey the pure strategy equilibrium in this game?

(a) One pure strategy is that both Mercedes and BMW manufacture hybrid vehicles.

(b) One pure strategy is that both Mercedes and BMW manufacture fully electric.

(c) One pure strategy is that Mercedes manufactures fully electric and BMW manufactures

Hybrid.

The other pure strategy is that Mercedes manufactures Hybrid and BMW

manufactures fully electric vehicles.

(d) One pure strategy is that both Mercedes and BMW refrains from manufacturing given the

negative and zero payoffs.

Question 6

Which of the following is an appropriate expression for total surplus?

(a) Total surplus = Price – Total Willingness to Pay

(b) Total surplus = Price – Marginal Cost

(c) Total surplus = Total Willingness to Pay – Marginal Cost

(d) Total surplus = Total Willingness to Pay – Price

Question 7

Which of the following is not a feature of the Stackleberg model?

(a) Firms are involved in price competition.

(b) a leader is able to commit to output before the follower(s).

(c) Firms produce identical products.

(d) Followers choose output to maximise profits after observing the leader’s output.

Question 8 (Fill in the blank question)

The demand for good X is given by P= 500 – 3Q, where Q is the market quantity, and P is the

market price. Production of good X involves costs of C = 100 + 20q, where q is firm output. If

a single firm operates in the market, then the profit-maximising price and quantity of the

monopolist are

and

, respectively.

Question 9

Suppose Burger King is located at kilometre zero and Pizza hut is located in at Kilometre M.

Both these restaurants are located on either end of a road that is K kilometres long.

Restaurants’ location is fixed, and they can only affect price. There are 100 customers spaced

equally along the road. Assume cost of travelling per kilometre = t, the cost of a meal at

Burger King= PB and the cost of a meal at Pizza Hut = PP

Based on the above information, which of the following expressions correctly shows the

location (x) of the marginal customer who remains indifferent between the two shops.

(a)

= ାಳିು ଶ௧

(b)

= ଶାಳାು ଶ

(c)

= ସ − ುିಳ ଶ௧ .

(d)

= ଶ + ುିಳ ଶ௧ .

Question 10 (fill in the blank/ drop down question)

Consider that a cable television company needs to decide about its monthly subscription for its

movie channels for two types of families, for families with dependent children (D) and for

families with no dependent children (N). Suppose the television company faces the following

inverse demand functions:

PD=28−4Q

PN=48−8Q

Where Q represents the number of movie channels watched each month. Further, assume that

the marginal cost of provision of the access to view the channels is zero.

If the television

company can identify two types of buyers (the families) with the information about whether

the families possess dependent children collected, then for an all or nothing deal, the television

company should charge the families without dependent children (N) and families with

dependent children (D) a monthly subscription price of

and

,

respectively.

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School of Economics, University of Sydney

Sample Descriptive questions

Question 1

Suppose you have been investing in a bundle of selected stocks (Y). You are aware of your expected

returns [E(Y)] and investment volatility measured by standard deviation () such that () = $1000 + . For any given value of

= $500, explain your certainty equivalent and risk premium?

(Use an appropriate fully labelled diagram in your answer).

[6 Marks]

Question 2

Consider that a firm embarks on a month-long sales campaign with flexible pricing options

for LED televisions and sound systems. There are four customers with valuations for each

of these products as indicated in the table below:

Customer LED Televisions Sound System

Wang 1300 500

John 1000 1000

Khan

500 1200

Jessica 1600 1000

The marginal and average cost of making a LED television is $900, and the marginal and

average cost of making a sound system is $600.

Explain the optimal pricing strategy of the firm if:

(i) there is no budling

(ii) bundling of the two products

(iii)

a mix or optional bundling.

How much profit will the company make in each case?

(Show your work detail.)

[7 Marks]

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