Five star rating for only correct answers.

(a) For the following stage game, check whether the strategy profile given (below) is a subgame- perfect equilibrium of the game in which the stage game is repeated infinitely many times. The discount rate is 6 = 0.9. Stage Game: Player 2 M R T (3,1) (0,0 (-1,2 Player 1 M (0,0) (0,0) (0,0) B (-1,2) (0,0) (-1,2) Strategy profile: Until some player deviates, player 1 plays T and player 2 plays L. If anyone deviates, then each plays M thereafter. (b) Consider the following stage game: Player 2 C D (1,1) (-1,3) Player 1 C D (2,-1) (0,0) Suppose that this game is played infinitely many times with discount factor 6. Consider the following strategies: Play C if all previous outcomes have been (C, C), otherwise, play D forever. For what values of o are these strategies a Nash equilibrium?Section C Calculation and Graphical Analysis (45 Marks) There are 6 questions in this section. All are compulsory. Clearly show all working and use graphical illustrations in places possible to substantiate your answer. Question 1 (15 Marks) The data of the open economy of Northland is given below. All values are in Smillions. Use the information given below and your knowledge to answer the questions that follows. Consumption: C= 10 +0.8 YD Disposable income: YD = Y-NT Government's net tax: NT = 02Y Planned investment: I = 40 Government's expenditure: G = 68 Export: X = 22 Import: 0.14Y (n) What is the value of the marginal propensity to consume? (1 Mark) (b) Calculate the value of the equilibrium level of income. (5 Marks) (c) Calculate and explain the type of government budget at the equilibrium level of income in (b) above. (3 Marks) (d) Calculate the government's expenditure multiplier. (2 Marks) (e) Calculate the recessionary gap or an inflationary gap that is created when the full employment level of potential GDP is $400 million. (1 Mark) (f) Using AD/AS model illustrate the recessionary gap or an inflationary gap that you have calculated in (c) above. (3 Marks) ECNSOlSem Semester 2, 2019 Page 6 of &Consider a homogeneous good industry (such as an agricultural product) with just two firms and a total market demand Q = 400-P, so the inverse demand is P = 400 - Q. Suppose both firms have a constant marginal cost equal to $100 per unit of output and a fixed cost equal to $10,000. One simple way to depict rivalry in a duopoly (2 firms) is the Cournot model. This model is reasonable in agricultural markets where firms choose production (plantings) in advance and the market price is determined later after the crop is harvested. In the Cournot model, we imagine that the two firms simultaneously choose their production or quantity and that demand (market clearing) determines the price given each firms' quantity. (a) Suppose (hypothetically) that the second firm produces 0 units, and the first firm anticipates this, so the first firm is the only seller. How much will the first firm produce (in this case the first firm acts as a monopolist and sets output where MR = MC)? Hint: The first firm's inverse demand is P = 400-(Q1 +Q2), but since Q2 = 0 we can write this as P = 400-Q1 and so MR = 400 - 2Q1. Mathematically this problem is the same as a monopoly problem. What quantity will firm 1 choose? What price will it charge? What are the producer surplus and profit? (b) Now suppose instead that the second firm produces exactly 100 units, and that the first firm anticipates this. The total output is the first firm's output, Q1, plus 100, so substituting Q1 + 100 for QT in the inverse demand implies that P = 300 - Q1. That is if firm 1 produces Q1 it expects the price to be 300-Q1. This implies that MR = 300-Q2. How much will firm 1 produce (set MR = MC)? What price will clear the market given the total output Q1 + Q2? What are the producer surplus and profit? (c) Explain intuitively why neither firm wants to change their production if each is producing 100 (Q1 = Q2 = 100)? Note that your are explaining why Q1 = Q2 = 100 is a Cournot-Nash equilibrium). (d) Calculate the total producer surplus (both firms) and consumer surplus in parts (a) and (b). Why is consumer surplus higher with 2 firms than with one firm? (e) Intuitively, why is the deadweight loss smaller with two firms than with only one firm?2) The diagram depicts Marco's choice of consumptions in periods 1 and 2. He has $100 worth of grain in period i and no income in period 2. Marco has two choices. In scheme 1, he can store the grain that he does not consume in period 1. This results in a loss of 20% of the grain due to pests and rotting. In scheme 2, he can sell the grain that he does not consume and lend the money at 10%. Based on this information, which of the following statements is correct? FF (store grain; 20% losses) FF (lend at 10%) 110 Marco's IC (medium utility) Consumption later ($) 39 MRS - MRT 26 Marco's IC (low utility) Marco's endowment 65 68 100 Consumption now ($) a. The substitution effect implies that Marco will consume more in period 1 under scheme 2 than under scheme 1. b. The income effect implies that Marco will consume more in period 2 and less in period 1 under scheme 2 than under scheme 1. c. Marco will unambiguously consume more in period 2 under scheme 2 than in scheme 1. d. Marco will unambiguously consume less in period 1 under scheme 2 than in scheme 1