Econ 110 Your Name ________________________

Yale University

PRACTICE FINAL

Before you begin the exam write your name on each page.

This exam has three parts:

Part I: Definitions – 3 terms worth 12 points.

You have 120 minutes to complete the exam.

This exam is given in strict accordance with the University policy with regard to
academic dishonesty prevention and sanctions. Any violations of the Honor Code (using
online resources, getting help from someone else, etc.) means, at a minimum, failure for
the course.
Part I: Definitions: Please read the question carefully before answering it.

Question 1 (10 points): Give a specific example for only FIVE of the following SIX
terms. (Each is 2 points). Explain with a sentence or two how your example fits into
definition. (The lecture and textbook examples will not count.) In case all are defined, the
first five will count.

Fixed Cost:

Price Discrimination:

Interest:

Efficient Market Hypothesis:

Pareto Optimality:

Public Good:

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Part II: True/False/Uncertain. Please indicate whether the following statements are
TRUE (T) or FALSE (F) or UNCERTAIN (U). Explain your reasoning with one or two
sentences. NO explanation, NO credit. (Each is 3 points, a total of 12 points plus a bonus
point)

1. A natural monopoly will operate at a profit if it produces a socially optimal level of

T F U

2. Need based financial aid allows colleges (like monopolists) to do perfect tuition
(price) discrimination.

T F U

3. Owning a stock in a monopoly is better than owning a stock in a perfectly competitive

T F U

4. If a monopsonist bought all the firms in the formerly competitive industry, the
quantity of labor hired will increase.

T F U

5. (1 point bonus) Aglot si taf tub looc.

T F U

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Part III: Problems: Please read the question carefully before answering it.

WARNING: Correct numerical answers with contextual explanations get full

1. Question 1 (16 points, 1 point for each correct answer, 1 point for graph): The market
demand curve for a pair of duopolists is given as: P = 15 - Q, where Q is the total
production of both firms, i.e., (QT = Q1 + Q2). Given that TC1 = 3Q1 and TC2 = 1 + 3Q2,

a. Find the Cournot equilibrium price, quantity, and profits.

P* _______ Q1* _______ Q2* _______ ∏1 _______ ∏2 _______

b. Find the Bertrand equilibrium price, quantity, and profits.

P* _______ Q1* _______ Q2* _______ ∏1 _______ ∏2 _______

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c. Find the Stackelberg equilibrium price, quantity, and profits, where Firm 1 is the
leader.

P* _______ Q1* _______ Q2* ________ ∏1 _______ ∏2 _______

d. Show the equilibrium price and quantity for each model (Cournot, Bertrand and
Stackelberg) in one graph.

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Question 2 (4 points, 1 point for each correct answer): In a competitive industry
consisting of 5,000 firms, the short-run marginal cost curve for each firm is given by MC
= 200 + 30Q. The demand curve faced by the industry is given as P = 400 - 0.002Q.

a. Find the equilibrium price and quantity for the industry.

P* _________ Q*INDUSTRY ________

b. Find the producer and consumer surpluses at the equilibrium price.

CS_________ PS___________

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Question 3 (4 points): Ann and Bob are the only two growers who provide organically
grown corn to a local grocery store. They know that if they cooperated and produced less
corn, they could raise the price of the corn. If they work independently, they will each
earn $100. If they decide to work together and both lower their output, they can each earn
$150. If one person lowers output and the other does not, the person who lowers output
will earn $0 and the other person will capture the entire market and will earn $200. First,
construct their payoff matrix below. What is the dominant strategy for each player, if
any? What is the Nash equilibrium in this game, if any?

ANN

BOB

Ann’s Dominant Strategy (if any):

Bob’s Dominant Strategy (if any):

Nash Equilibrium (if any):

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Question 4 (4 points; 1 point for each correct answer, 2 points for graph) a) A
monopolist’s demand curve for labor is given by w = 42 – 4L, where w is the hourly
wage rate and L is the number of person-hours hired. If the monopolist is hiring from
perfectly competitive labor market where labor supply is w = 10 how many units of labor
would it employ? If the government breaks up the monopoly, turning the market structure
into perfect competition how many units of labor would the firm employ? Graph your
answers.

L*M ________ L*PC ________

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Question 5 (2 points): A machine that costs $425 will yield return of $100 each year for
two years. At the end of the two years, at which time it will be sold for $250. If the
interest rate facing this firm is 5 percent, should it purchase this machine?

PV _____________ Decision ___________

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Part IV: Essays: Please read the question carefully before answering it.

Question 1 (6 points): Carbon-emission-trading aims at controlling CO2 pollution.

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Question 2 (6 points): What is wage discrimination? Explain all types of wage
discrimination with a specific example for each. (The lecture and textbook examples will
not count.)

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Question 3 (6 points): Discuss the theories of stock market with a specific example for
each. (The lecture and textbook examples will not count.) Which one explains stock
market behavior better in your opinion?

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