1. Suppose that a firm has increasing marginal cost, and a positive fixed cost. What happens to minimum efficient scale if the fixed cost increases? 10 points 2. Suppose that the same tax is imposed across two competitive markets - A and B. You know that across the two markets supply and demand are linear, and that in market A tax revenue is larger than in market B. Compare the dead weight loss across the two markets. 10 points 3. Suppose Craig gets 30 dollars tomorrow if he is employed and 0 dollars if he is laid off. Craig is risk averse and has utility function U(x) = vz. Craig's exploitative friend Jenny is risk neutral and offers Craig insurance. Jenny makes the following take it or leave it offer to Craig: she asks him to pay a premium P in the case he is employed, and in exchange offers benefit B if Craig gets laid off. The commonly known probability of Craig being laid off is pe (0, 1). (a) What premium and benefit should Jenny offer Craig to maximize her own profit? 15 points (b) Evaluate the truth of the following statement and provide intuition: The higher the risk of being laid off, the more Craig values insurance and the higher profit potential for Jenny. 10 points 4. Suppose that the market for housing is perfectly competitive, i.e. there are many consumers, and that housing is a normal good. Next year half the consumers will be getting an income shock that is either negative or positive. Every consumer who will potentially receive the shock knows they will be getting a shock. First suppose that shocks are independent and identically distributed across individuals. Note: in the following questions I ask you to compare the level of risk. The kind of comparison I expect you to make is as follows: a distribution that pays out a with probability p and b with probability (1 - p), it is more risky than a distribution that pays out c with probability p and d with probability (1 - p) where a 2 c 2 d 2 b. (a) Assume that half the consumers who will experience the shock have the same high WTP while the other half have the same low WTP. Who experiences more risk in their CS from housing (i.e. dispersion), consumers who know about the shock and have high WTP, or consumers who know about the shock and have low WTP? 10 points (b) Could consumers who do not expect a shock experience more risk than those who do? Give an example or provide reasoning. 5 points (c) Suppose that shocks are now perfectly correlated across individuals (i.e. all shocked individuals either receive the positive shock or all receive the negative shock), could consumers who do not expect a shock experience more risk than those who do? Give an example or provide reasoning. 10 points 5. True or False. If true explain your reasoning, if False give a counterexample: A mo- nopolist will charge a higher price when facing a higher demand, i.e. higher willingness to pay for any given quantity. 10 points 6. Which market structure gives more consumer surplus, Cournot (simultaneous) or Stackelberg (sequential)? Explain your answer. 10 points