Econmics

UNIVERSITY OF WISCONSIN-MILWAUKEE

PRINCIPLES OF MICROECONOMICS

CHAKRABARTI ECON. 103 FALL 2015

FINAL EXAMINATION

Deadline: Monday, December 21, 2015

[Note: Answer any one of the following two questions. You must submit your answers by

the deadline (above) in PDF format as an attachment to an electronic mail addressed to

[email protected]. Hand-written answers and/or hand-drawn graphs will not be graded.

Any answer without clear and precise explanation will not receive any credit.]

Good Luck!

Question 1. A. [25 points] Suppose the market for semiconductors in the U.S. is characterized by:

D = 200 – 40P [Demand] S = 40 + 40P [Supply] The market for semiconductors in the rest of the world is characterized by: D = 160 – 40P [Demand] S = 80 + 40P [Supply] Suppose the U.S. government imposes a quota of 32 units on its imports. Calculate the magnitude of the deadweight loss resulting from the quota under the assumption that the U.S. is a small open economy.

B. [25 points] Consider the following predation game involving an incumbent and a potential entrant. Payoffs are written with the potential entrant’s profits listed first and the incumbent’s listed second. The profit numbers represent discounted values over the life of the firms.

i) What is the equilibrium of this game?

ii) Would the equilibrium be different if the (-5, 0) payoff were instead (-5, 8)?

Stays Out

Enters Incumbent

Predates

Accommodates

(0, 10)

(-5, 0)

(4, 6)

Potential Entrant

Question 2.

A. [25 points] Suppose the market for cigarettes is characterized by the following information: Qd = 70 – 5P [Demand] Qs = 3P – 10 [Supply] [Note: P = price per unit; Qd = thousands of units demanded; Qs = thousands of units supplied] Suppose the government imposes a sales tax of $2 per unit. Answer questions (i) through (v) below:

i) Calculate the magnitude of the consumer surplus and producer surplus in the pre-tax equilibrium. ii) Calculate the tax revenue in the post-tax equilibrium. iii) Calculate the change in consumer surplus due to the sales tax. iv) Calculate the change in producer surplus due to the sales tax. v) Calculate the Dead-Weight-Loss due to the sales tax.

B. [25 points] Suppose the government imposes a price ceiling of $50 on a market characterized by the following information:

Qd = 700 - 2P Qs = 100 + 4P [Note: P = price per unit; Qd = hundreds of units demanded; Qs = hundreds of units supplied] Calculate the magnitude of deadweight loss from the price ceiling. Find a price floor that will result in the same magnitude of deadweight loss.