A proposal was considered by European Union regarding the use of cap-and-trade systemto limit the damage caused by Spam, Phishing, malware etc. (I was one of the reviewers of this report which deals with other policy issues aswell).The proposal argues that ISPs can stop the "pollution" by deploying proper filtering techniques. Let's just focus on Spam. Suppose there are two ISPs and we can verify that they are the source of spam. ISP A causes 100 million units of spam and ISP B causes 50 million units of spam. The social cost of spam is $250 per million spam. Each firm profits significantly from mass email operations that generate this spam.

It will cost ISP A $300 per million to remove spam while it will cost ISP B $200 per million to remove spam.

You were asked to provide a recommendation on the right tax amount. What tax would you recommend and why? How would firms respond to your tax?(4)

The industry however complains of eliminating the spam completely and recommends that we should start with a 10% reduction in spam in year 1. Let's say you believe that a cap and trade will produce the best outcome (i.e. actually reduce the overall spam by 10% at the least cost). You have an idea about how much spam they produce (but you do not have idea about their costs). Tell us clearly how such a system will produce the desired outcome at the lowest cost.(4)

address all

2. Consider two individuals, Carole and Mo, who each have a job opportunity that pays a wage of $20 per hour and allows them to choose the number of hours per week they'd like to work. Carole has stronger preferences for leisure than Mo. Ultimately, both Carole and Mo choose to work more than zero hours per week.

Draw (and upload) one graph that includes:

Carole and Mo's income-leisure constraint Carole's utility-maximizing indifference curve (UC) and choice of leisure hours (LC) Mo's utility-maximizing indifference curve (UM) and choice of leisure hours (LM) [Note: There are multiple, though similar, ways to draw this graph. Focus on ensuring that the constraint, indifference curves and hours worked align with the information provided above.]

3. Consider an individual who lives in an economy without a welfare program. They initially work T-L0 hours per week, where (T-L0)>0. They earn an hourly wage (W) and no non-labour income.

a) Draw a graph that reflects this individual's income-leisure constraint, utility-maximizing indifference curve (U0), choice of leisure hours (L0) and income (Y0).

b) Now, assume that a welfare program has been implemented in this economy. The welfare benefit is smaller than the individual's initial income level (Y0) and there is a 50% clawback on any labour income earned. The individual now maximizes their utility by working and collecting a partial welfare benefit.

On the same graph as part a, draw this individual's new income-leisure constraint, utility-maximizing indifference curve (U1), choice of leisure hours (L1) and income (Y1).

4. Consider an individual who initially works T-L0 hours per week, where (T-L0)>0. They earn an hourly wage (W) and no non-labour income.

a) Draw a graph that reflects this individual's income-leisure constraint, utility-maximizing indifference curve (U0) and choice of leisure hours (L0).

b) The government then implements a wage subsidy program in which worker wages are increased by 10%. This wage subsidy program has no limits, so there is no phase-in/out. This wage subsidy produces both an income effect and a substitution effect on the worker's choice of leisure hours. Assume that the substitution effect is stronger than the income effect.

On the same graph as part a, draw this individual's new income-leisure constraint, utility-maximizing indifference curve (US) and choice of leisure hours (LS).

[Note: When incorporating the 10% wage subsidy into the graph in part b, I am not expecting perfect precision. Just try your best to draw the new income-leisure constraint as though a 10% wage subsidy has been added.]

5. Consider an individual who was employed prior to having a child. Now, they face daycare costs (M) if they choose to go back to work. Assume that they earn an hourly wage (W) and their non-labour income (YN) is greater than their daycare costs (YN > M). Despite the daycare costs, this individual chooses to work T-L0 hours per week.

Draw a graph that reflects this individual's income-leisure constraint (both with and without daycare costs), utility-maximizing indifference curve (U0) and choice of leisure hours (L0).

6. Consider an individual who had been planning to retire in five years. Unfortunately, they've just been laid off and the highest-paying job they've been able to find pays a lower hourly wage than did their previous job.

a) Using the concepts of the income and/or substitution effect, describe why we might expect this individual to retire earlier than they originally planned.

b) Using the concepts of the income and/or substitution effect, describe why we might expect this individual to retire later than they originally planned.

Question 1 In a perfectly competitive market in equilibrium, consumers may receive a net benefit from their purchases in the market. This net benefit is measured by the: A) Excess demand. B) Consumer surplus. C) Price elasticity of demand. D) The price of the good. Question 2 The price of electricity fell by 10 percent and consumption increased by 8 percent. The elesticity of demand for electricity was___ and we would say that electricity demands was____. A) 1.25; inelastic B) 0.8; inelastic C) 0.8; elastic D) 1.25; elastic Question 3 Suppose the price of gasoline increases but motorists in the portland area spend more on gasoline. This situation: A) Proves that the law of demand does not apply in Portland. B) Means that the demand for gasoline is inelastic. C) Must be due to an increase in an excise tax on gasoline. D) Means that the demand for gasoline is elastic. Question 4 Which of the following is the best example of an equilibrium? A) During the morning rush hour, it takes 45 minutes to drive into downtown on the freeway but only 30 minutes on side streets. B) Two sections of the same course meet at the same time across the hall from each other. Both instructors are ewually competent. One section is overcrowded while the other section has empty seats. C) A new game console has just gone on the market but it is impossible to find one for sale in the Portland area. D) The ARCO Station charges $3.65 for gas while, across the street, the shell station charges $3.95. A line of cars waits at the ARCO station but there is no line at the shell station.

Assume the same demand and cost structures as in problem 4, but now firm 1 enters the market first and firm 2 follows, as in the Stackelberg model from lecture (both firms are guar- anteed to enter; the only choice is quantities produced).

Question 6 We will modify the game from above. Firm 2 now has the possibility of suing Firm 1 for violating lunar regolith preservation laws, after observing the first firm's choices. The lawsuit is costly for both parties, because it requires hiring a bunch of experts and stopping operations for a while. The lawsuit does not affect quantities or prices in the market. We'll model lawsuit costs as both firms having to pay an extra cost equal to one if there is a lawsuit. That will provide firm 2 with a means to "punish" firm 1 for overproducing. The game has three stages. In the first, firm 1 enters and chooses the quantity q1. In stage 2, firm 2 observes firm 1's choices as decides whether to start the lawsuit or not. At the last stage, firm 2 chooses its quantity produced q2 and "the market" determines the price given the quantities produced by both firms. In order to derive the subgame perfect Nash Equilibrium of this game, we proceed using backward induction. What should we look for when solving the second-to-last step (stage 2) using backward induction? (a) q2 as a function of q1 and of whether the lawsuit is in place. (b) Whether to create the lawsuit or not as a function of q1 and q2. (c) q1 as a function of q2 and whether the lawsuit is in place. (d) Whether to create the lawsuit or not as as a function of q1.

(e) q2 as a function of q1 only.

Derive the excess demand function z(p) for the economy, for example:

Let us take a simple two-person economy and solve for a Walrasian equilibrium. Let consumers 1 and 2 have identical CES utility functions,

ui(x1, x2) = x1+ x2 , i = 1, 2, where 0 < < 1. Let there be 1 unit of each good and suppose each consumer owns all of one good, so initial endowments are e1 = (1, 0) and e2 = (0, 1). Because the aggregate endowment of each good is strictly positive and the CES form of utility is strongly increasing and strictly quasiconcave on Rn+ when 0 < < 1

In addition, find all the Pareto ecient allocations of the economy. Which of them are in the core of the economy?

1. a labour force can be broken down as follows:

- potential labour force participants: 40 million

- employed: 28 million

- not working, but actively seeking work: 1.5 million

-full-time students: 3 million

- retired: 4.9 million

- not working, discouraged because of lack of jobs: 600,000

-not working, household workers: 2 million

a) using the numbers above, calculate this economy's labour force participation rate

b) using these numbers above, calculate this economy's unemployment rate.

2. Consider two individuals, Carole and Mo, who each have a job opportunity that pays a wage of $20 per hour and allows them to choose the number of hours per week they'd like to work. Carole has stronger preferences for leisure than Mo. Ultimately, both Carole and Mo choose to work more than zero hours per week.

Draw (and upload) one graph that includes:

Carole and Mo's income-leisure constraint Carole's utility-maximizing indifference curve (UC) and choice of leisure hours (LC) Mo's utility-maximizing indifference curve (UM) and choice of leisure hours (LM) [Note: There are multiple, though similar, ways to draw this graph. Focus on ensuring that the constraint, indifference curves and hours worked align with the information provided above.]

3. Consider an individual who lives in an economy without a welfare program. They initially work T-L0 hours per week, where (T-L0)>0. They earn an hourly wage (W) and no non-labour income.

a) Draw a graph that reflects this individual's income-leisure constraint, utility-maximizing indifference curve (U0), choice of leisure hours (L0) and income (Y0).

b) Now, assume that a welfare program has been implemented in this economy. The welfare benefit is smaller than the individual's initial income level (Y0) and there is a 50% clawback on any labour income earned. The individual now maximizes their utility by working and collecting a partial welfare benefit.

On the same graph as part a, draw this individual's new income-leisure constraint, utility-maximizing indifference curve (U1), choice of leisure hours (L1) and income (Y1).

4. Consider an individual who initially works T-L0 hours per week, where (T-L0)>0. They earn an hourly wage (W) and no non-labour income.

a) Draw a graph that reflects this individual's income-leisure constraint, utility-maximizing indifference curve (U0) and choice of leisure hours (L0).

b) The government then implements a wage subsidy program in which worker wages are increased by 10%. This wage subsidy program has no limits, so there is no phase-in/out. This wage subsidy produces both an income effect and a substitution effect on the worker's choice of leisure hours. Assume that the substitution effect is stronger than the income effect.

On the same graph as part a, draw this individual's new income-leisure constraint, utility-maximizing indifference curve (US) and choice of leisure hours (LS).

[Note: When incorporating the 10% wage subsidy into the graph in part b, I am not expecting perfect precision. Just try your best to draw the new income-leisure constraint as though a 10% wage subsidy has been added.]

5. Consider an individual who was employed prior to having a child. Now, they face daycare costs (M) if they choose to go back to work. Assume that they earn an hourly wage (W) and their non-labour income (YN) is greater than their daycare costs (YN > M). Despite the daycare costs, this individual chooses to work T-L0 hours per week.

Draw a graph that reflects this individual's income-leisure constraint (both with and without daycare costs), utility-maximizing indifference curve (U0) and choice of leisure hours (L0).

6. Consider an individual who had been planning to retire in five years. Unfortunately, they've just been laid off and the highest-paying job they've been able to find pays a lower hourly wage than did their previous job.

a) Using the concepts of the income and/or substitution effect, describe why we might expect this individual to retire earlier than they originally planned.

b) Using the concepts of the income and/or substitution effect, describe why we might expect this individual to retire later than they originally planned.

Question 1 In a perfectly competitive market in equilibrium, consumers may receive a net benefit from their purchases in the market. This net benefit is measured by the: A) Excess demand. B) Consumer surplus. C) Price elasticity of demand. D) The price of the good. Question 2 The price of electricity fell by 10 percent and consumption increased by 8 percent. The elesticity of demand for electricity was___ and we would say that electricity demands was____. A) 1.25; inelastic B) 0.8; inelastic C) 0.8; elastic D) 1.25; elastic Question 3 Suppose the price of gasoline increases but motorists in the portland area spend more on gasoline. This situation: A) Proves that the law of demand does not apply in Portland. B) Means that the demand for gasoline is inelastic. C) Must be due to an increase in an excise tax on gasoline. D) Means that the demand for gasoline is elastic. Question 4 Which of the following is the best example of an equilibrium? A) During the morning rush hour, it takes 45 minutes to drive into downtown on the freeway but only 30 minutes on side streets. B) Two sections of the same course meet at the same time across the hall from each other. Both instructors are ewually competent. One section is overcrowded while the other section has empty seats. C) A new game console has just gone on the market but it is impossible to find one for sale in the Portland area. D) The ARCO Station charges $3.65 for gas while, across the street, the shell station charges $3.95. A line of cars waits at the ARCO station but there is no line at the shell station.

Assume the same demand and cost structures as in problem 4, but now firm 1 enters the market first and firm 2 follows, as in the Stackelberg model from lecture (both firms are guar- anteed to enter; the only choice is quantities produced).

Question 6 We will modify the game from above. Firm 2 now has the possibility of suing Firm 1 for violating lunar regolith preservation laws, after observing the first firm's choices. The lawsuit is costly for both parties, because it requires hiring a bunch of experts and stopping operations for a while. The lawsuit does not affect quantities or prices in the market. We'll model lawsuit costs as both firms having to pay an extra cost equal to one if there is a lawsuit. That will provide firm 2 with a means to "punish" firm 1 for overproducing. The game has three stages. In the first, firm 1 enters and chooses the quantity q1. In stage 2, firm 2 observes firm 1's choices as decides whether to start the lawsuit or not. At the last stage, firm 2 chooses its quantity produced q2 and "the market" determines the price given the quantities produced by both firms. In order to derive the subgame perfect Nash Equilibrium of this game, we proceed using backward induction. What should we look for when solving the second-to-last step (stage 2) using backward induction? (a) q2 as a function of q1 and of whether the lawsuit is in place. (b) Whether to create the lawsuit or not as a function of q1 and q2. (c) q1 as a function of q2 and whether the lawsuit is in place. (d) Whether to create the lawsuit or not as as a function of q1.

(e) q2 as a function of q1 only.

Derive the excess demand function z(p) for the economy, for example:

Let us take a simple two-person economy and solve for a Walrasian equilibrium. Let consumers 1 and 2 have identical CES utility functions,

ui(x1, x2) = x1+ x2 , i = 1, 2, where 0 < < 1. Let there be 1 unit of each good and suppose each consumer owns all of one good, so initial endowments are e1 = (1, 0) and e2 = (0, 1). Because the aggregate endowment of each good is strictly positive and the CES form of utility is strongly increasing and strictly quasiconcave on Rn+ when 0 < < 1

In addition, find all the Pareto ecient allocations of the economy. Which of them are in the core of the economy?

1. a labour force can be broken down as follows:

- potential labour force participants: 40 million

- employed: 28 million

- not working, but actively seeking work: 1.5 million

-full-time students: 3 million

- retired: 4.9 million

- not working, discouraged because of lack of jobs: 600,000

-not working, household workers: 2 million

a) using the numbers above, calculate this economy's labour force participation rate

b) using these numbers above, calculate this economy's unemployment rate.

2. Consider two individuals, Carole and Mo, who each have a job opportunity that pays a wage of $20 per hour and allows them to choose the number of hours per week they'd like to work. Carole has stronger preferences for leisure than Mo. Ultimately, both Carole and Mo choose to work more than zero hours per week.

Draw (and upload) one graph that includes:

Carole and Mo's income-leisure constraint Carole's utility-maximizing indifference curve (UC) and choice of leisure hours (LC) Mo's utility-maximizing indifference curve (UM) and choice of leisure hours (LM) [Note: There are multiple, though similar, ways to draw this graph. Focus on ensuring that the constraint, indifference curves and hours worked align with the information provided above.]

3. Consider an individual who lives in an economy without a welfare program. They initially work T-L0 hours per week, where (T-L0)>0. They earn an hourly wage (W) and no non-labour income.

a) Draw a graph that reflects this individual's income-leisure constraint, utility-maximizing indifference curve (U0), choice of leisure hours (L0) and income (Y0).

b) Now, assume that a welfare program has been implemented in this economy. The welfare benefit is smaller than the individual's initial income level (Y0) and there is a 50% clawback on any labour income earned. The individual now maximizes their utility by working and collecting a partial welfare benefit.

On the same graph as part a, draw this individual's new income-leisure constraint, utility-maximizing indifference curve (U1), choice of leisure hours (L1) and income (Y1).

4. Consider an individual who initially works T-L0 hours per week, where (T-L0)>0. They earn an hourly wage (W) and no non-labour income.

a) Draw a graph that reflects this individual's income-leisure constraint, utility-maximizing indifference curve (U0) and choice of leisure hours (L0).

b) The government then implements a wage subsidy program in which worker wages are increased by 10%. This wage subsidy program has no limits, so there is no phase-in/out. This wage subsidy produces both an income effect and a substitution effect on the worker's choice of leisure hours. Assume that the substitution effect is stronger than the income effect.

On the same graph as part a, draw this individual's new income-leisure constraint, utility-maximizing indifference curve (US) and choice of leisure hours (LS).

[Note: When incorporating the 10% wage subsidy into the graph in part b, I am not expecting perfect precision. Just try your best to draw the new income-leisure constraint as though a 10% wage subsidy has been added.]

5. Consider an individual who was employed prior to having a child. Now, they face daycare costs (M) if they choose to go back to work. Assume that they earn an hourly wage (W) and their non-labour income (YN) is greater than their daycare costs (YN > M). Despite the daycare costs, this individual chooses to work T-L0 hours per week.

Draw a graph that reflects this individual's income-leisure constraint (both with and without daycare costs), utility-maximizing indifference curve (U0) and choice of leisure hours (L0).

6. Consider an individual who had been planning to retire in five years. Unfortunately, they've just been laid off and the highest-paying job they've been able to find pays a lower hourly wage than did their previous job.

a) Using the concepts of the income and/or substitution effect, describe why we might expect this individual to retire earlier than they originally planned.

b) Using the concepts of the income and/or substitution effect, describe why we might expect this individual to retire later than they originally planned.

Question 1 In a perfectly competitive market in equilibrium, consumers may receive a net benefit from their purchases in the market. This net benefit is measured by the: A) Excess demand. B) Consumer surplus. C) Price elasticity of demand. D) The price of the good. Question 2 The price of electricity fell by 10 percent and consumption increased by 8 percent. The elesticity of demand for electricity was___ and we would say that electricity demands was____. A) 1.25; inelastic B) 0.8; inelastic C) 0.8; elastic D) 1.25; elastic Question 3 Suppose the price of gasoline increases but motorists in the portland area spend more on gasoline. This situation: A) Proves that the law of demand does not apply in Portland. B) Means that the demand for gasoline is inelastic. C) Must be due to an increase in an excise tax on gasoline. D) Means that the demand for gasoline is elastic. Question 4 Which of the following is the best example of an equilibrium? A) During the morning rush hour, it takes 45 minutes to drive into downtown on the freeway but only 30 minutes on side streets. B) Two sections of the same course meet at the same time across the hall from each other. Both instructors are ewually competent. One section is overcrowded while the other section has empty seats. C) A new game console has just gone on the market but it is impossible to find one for sale in the Portland area. D) The ARCO Station charges $3.65 for gas while, across the street, the shell station charges $3.95. A line of cars waits at the ARCO station but there is no line at the shell station.

Assume the same demand and cost structures as in problem 4, but now firm 1 enters the market first and firm 2 follows, as in the Stackelberg model from lecture (both firms are guar- anteed to enter; the only choice is quantities produced).

Question 6 We will modify the game from above. Firm 2 now has the possibility of suing Firm 1 for violating lunar regolith preservation laws, after observing the first firm's choices. The lawsuit is costly for both parties, because it requires hiring a bunch of experts and stopping operations for a while. The lawsuit does not affect quantities or prices in the market. We'll model lawsuit costs as both firms having to pay an extra cost equal to one if there is a lawsuit. That will provide firm 2 with a means to "punish" firm 1 for overproducing. The game has three stages. In the first, firm 1 enters and chooses the quantity q1. In stage 2, firm 2 observes firm 1's choices as decides whether to start the lawsuit or not. At the last stage, firm 2 chooses its quantity produced q2 and "the market" determines the price given the quantities produced by both firms. In order to derive the subgame perfect Nash Equilibrium of this game, we proceed using backward induction. What should we look for when solving the second-to-last step (stage 2) using backward induction? (a) q2 as a function of q1 and of whether the lawsuit is in place. (b) Whether to create the lawsuit or not as a function of q1 and q2. (c) q1 as a function of q2 and whether the lawsuit is in place. (d) Whether to create the lawsuit or not as as a function of q1.

(e) q2 as a function of q1 only.

Derive the excess demand function z(p) for the economy, for example:

Let us take a simple two-person economy and solve for a Walrasian equilibrium. Let consumers 1 and 2 have identical CES utility functions,

ui(x1, x2) = x1+ x2 , i = 1, 2, where 0 < < 1. Let there be 1 unit of each good and suppose each consumer owns all of one good, so initial endowments are e1 = (1, 0) and e2 = (0, 1). Because the aggregate endowment of each good is strictly positive and the CES form of utility is strongly increasing and strictly quasiconcave on Rn+ when 0 < < 1

In addition, find all the Pareto ecient allocations of the economy. Which of them are in the core of the economy?

1. a labour force can be broken down as follows:

- potential labour force participants: 40 million

- employed: 28 million

- not working, but actively seeking work: 1.5 million

-full-time students: 3 million

- retired: 4.9 million

- not working, discouraged because of lack of jobs: 600,000

-not working, household workers: 2 million

a) using the numbers above, calculate this economy's labour force participation rate

b) using these numbers above, calculate this economy's unemployment rate.

2. Consider two individuals, Carole and Mo, who each have a job opportunity that pays a wage of $20 per hour and allows them to choose the number of hours per week they'd like to work. Carole has stronger preferences for leisure than Mo. Ultimately, both Carole and Mo choose to work more than zero hours per week.

Draw (and upload) one graph that includes:

Carole and Mo's income-leisure constraint Carole's utility-maximizing indifference curve (UC) and choice of leisure hours (LC) Mo's utility-maximizing indifference curve (UM) and choice of leisure hours (LM) [Note: There are multiple, though similar, ways to draw this graph. Focus on ensuring that the constraint, indifference curves and hours worked align with the information provided above.]

3. Consider an individual who lives in an economy without a welfare program. They initially work T-L0 hours per week, where (T-L0)>0. They earn an hourly wage (W) and no non-labour income.

a) Draw a graph that reflects this individual's income-leisure constraint, utility-maximizing indifference curve (U0), choice of leisure hours (L0) and income (Y0).

b) Now, assume that a welfare program has been implemented in this economy. The welfare benefit is smaller than the individual's initial income level (Y0) and there is a 50% clawback on any labour income earned. The individual now maximizes their utility by working and collecting a partial welfare benefit.

On the same graph as part a, draw this individual's new income-leisure constraint, utility-maximizing indifference curve (U1), choice of leisure hours (L1) and income (Y1).

4. Consider an individual who initially works T-L0 hours per week, where (T-L0)>0. They earn an hourly wage (W) and no non-labour income.

a) Draw a graph that reflects this individual's income-leisure constraint, utility-maximizing indifference curve (U0) and choice of leisure hours (L0).

b) The government then implements a wage subsidy program in which worker wages are increased by 10%. This wage subsidy program has no limits, so there is no phase-in/out. This wage subsidy produces both an income effect and a substitution effect on the worker's choice of leisure hours. Assume that the substitution effect is stronger than the income effect.

On the same graph as part a, draw this individual's new income-leisure constraint, utility-maximizing indifference curve (US) and choice of leisure hours (LS).

[Note: When incorporating the 10% wage subsidy into the graph in part b, I am not expecting perfect precision. Just try your best to draw the new income-leisure constraint as though a 10% wage subsidy has been added.]

Which of the following payback periods in a cost/benefit analysis would businesses prefer if all other things were equal: A. 2 years B. 1 year C. 3 years D. 4 years 40. An example of an internal change that could affect a business's sales forecast is a change in the A. length of a national recession. B. number of competitors in the market. C. size of the sales force. D. levels of consumer spending. 41. Ethan is developing common-size financial statements so that he can compare financial performance across several different companies. Ethan is conducting___ analysis. A. horizontal B. vertical C. ratio D. trend 42. Jana noticed a problem while reviewing her company's monthly income statement. She verified that the total revenue was $4,590 and the total expenses were $1,452. However, the income statement showed a net income total of $1,383. Which of the following reflects the correct net income: A. $3,381 B. $5,973 C. $3,138 D. $1,833 43. Why do interviewers usually focus on asking questions that are related to a job applicant's performance? A. To understand complaints B. To take remedial action C. To determine qualifications D. To plan future training

5. Consider an individual who was employed prior to having a child. Now, they face daycare costs (M) if they choose to go back to work. Assume that they earn an hourly wage (W) and their non-labour income (YN) is greater than their daycare costs (YN > M). Despite the daycare costs, this individual chooses to work T-L0 hours per week.

Draw a graph that reflects this individual's income-leisure constraint (both with and without daycare costs), utility-maximizing indifference curve (U0) and choice of leisure hours (L0).

6. Consider an individual who had been planning to retire in five years. Unfortunately, they've just been laid off and the highest-paying job they've been able to find pays a lower hourly wage than did their previous job.

a) Using the concepts of the income and/or substitution effect, describe why we might expect this individual to retire earlier than they originally planned.

b) Using the concepts of the income and/or substitution effect, describe why we might expect this individual to retire later than they originally planned.

Question 1 In a perfectly competitive market in equilibrium, consumers may receive a net benefit from their purchases in the market. This net benefit is measured by the: A) Excess demand. B) Consumer surplus. C) Price elasticity of demand. D) The price of the good. Question 2 The price of electricity fell by 10 percent and consumption increased by 8 percent. The elesticity of demand for electricity was___ and we would say that electricity demands was____. A) 1.25; inelastic B) 0.8; inelastic C) 0.8; elastic D) 1.25; elastic Question 3 Suppose the price of gasoline increases but motorists in the portland area spend more on gasoline. This situation: A) Proves that the law of demand does not apply in Portland. B) Means that the demand for gasoline is inelastic. C) Must be due to an increase in an excise tax on gasoline. D) Means that the demand for gasoline is elastic. Question 4 Which of the following is the best example of an equilibrium? A) During the morning rush hour, it takes 45 minutes to drive into downtown on the freeway but only 30 minutes on side streets. B) Two sections of the same course meet at the same time across the hall from each other. Both instructors are ewually competent. One section is overcrowded while the other section has empty seats. C) A new game console has just gone on the market but it is impossible to find one for sale in the Portland area. D) The ARCO Station charges $3.65 for gas while, across the street, the shell station charges $3.95. A line of cars waits at the ARCO station but there is no line at the shell station.

Assume the same demand and cost structures as in problem 4, but now firm 1 enters the market first and firm 2 follows, as in the Stackelberg model from lecture (both firms are guar- anteed to enter; the only choice is quantities produced).

Question 6 We will modify the game from above. Firm 2 now has the possibility of suing Firm 1 for violating lunar regolith preservation laws, after observing the first firm's choices. The lawsuit is costly for both parties, because it requires hiring a bunch of experts and stopping operations for a while. The lawsuit does not affect quantities or prices in the market. We'll model lawsuit costs as both firms having to pay an extra cost equal to one if there is a lawsuit. That will provide firm 2 with a means to "punish" firm 1 for overproducing. The game has three stages. In the first, firm 1 enters and chooses the quantity q1. In stage 2, firm 2 observes firm 1's choices as decides whether to start the lawsuit or not. At the last stage, firm 2 chooses its quantity produced q2 and "the market" determines the price given the quantities produced by both firms. In order to derive the subgame perfect Nash Equilibrium of this game, we proceed using backward induction. What should we look for when solving the second-to-last step (stage 2) using backward induction? (a) q2 as a function of q1 and of whether the lawsuit is in place. (b) Whether to create the lawsuit or not as a function of q1 and q2. (c) q1 as a function of q2 and whether the lawsuit is in place. (d) Whether to create the lawsuit or not as as a function of q1.