Macro quiz answer.

EC202-5-FY 10 9 Answer both parts of this question. (a) Firm A and Firm B produce a homogenous good and are Cournot duopolists. The firms face an inverse market demand curve given by P = 10- Q. where P is the market price and Q is the market quantity demanded. The marginal and average cost of each firm is 4. i. [10 marks] Show that if the firms compete as Cournot duopolists that the total in- dustry output is 4 and that if instead the firms merge into a single firm (monopoly). then the total industry output is 3 after the merger. Derive the market price, per firm profit, and consumer surplus when the firms compete as Cournot duopolists and when they merge into a monopoly. Explain the differences in these variables between the duopoly and monopoly markets. ii. [5 marks] Should a regulator who aims to maximize social welfare for this market permit the merger? Explain your answer. (b) [10 marks] Firm C and Firm D produce a homogeneous good for the same market. The constant unit cost for each firm is 2. Market demand is completely inelastic: there are 10 consumers, each buys at most one unit of the good and is willing to pay up to 10 for it. The firms are Bertrand duopolists and compete in prices. If they charge the same price, they split the corresponding demand equally, otherwise the firm with the lower price gets the whole demand. What is the Nash equilibrium of this game? Explain your answer.n B discriminates against blacks with a discrimination coefficient of .25. How many workers of each race does this firm hire? How much profit does it earn? c. Firm C has a discrimination coefficient equal to 1.25. How many workers of each race does this firm hire? How much profit does it earn? d. What kind of discrimination are Firms B and C exercising? Taste-based discrimination Statistical discrimination Both taste-based and statistical discrimination Cannot be determined e. Consider a law that requires any given firm to pay its black workers the same wage as its white workers? How effective would this racial wage or employment gap in this model? f. Suppose entrepreneurs can start new widget-producing firms using the same production function as existing firms. Also assume firms must shut down if they make negative profits. In the model above, how might free entry/exit in and out of the widget market help reduce the racial wage and employment gap over the long term?3. Suppose people with 15 years of schooling average earnings of $60,000 while people with 16 years of education average $66,000. a. What is the annual rate of return associated with the 16" year of education? b. It is typically thought that this type of calculation of the returns to schooling is biased, because it doesn't take into account innate ability or innate motivation. If this criticism is true, is the actual return to the 16" year of schooling more than or less than your answer in part (a)? 4. Consider a competitive economy that has four different jobs that vary by their wage and risk level. The table below describes each of the four jobs. Job Risk ( r ) Wage ( w ) 1/5 1/4 $12 1/3 $23 $25 All workers are equally productive, but workers vary in their preferences. Consider a worker who values his wage and the risk level according to the following utility function: 4 Where does the worker choose to work? Suppose the government regulated the workplace and required all jobs to have a risk factor of 1/5 ( that is, all jobs become A jobs). What wage would the worker now need to earn in the A job to be equally happy following the regulation?. (Inverse) labor demand for low-skilled workers in Arizona is determined by w=32 - 0.2E where E is the number of workers (in millions) and w is the hourly wage. There are 30 million native low-skilled workers in Arizona who supply labor inelastically. If the United States opened its borders to immigration from Mexico, 5 million low-skill immigrants would enter Arizona and supply labor inelastically. Assume that low-skilled immigrants are perfect substitutes for low-skilled native workers. a. Illustrate the effect of immigration in this labor market on a graph. b. What is the market-clearing wage if immigration is not allowed? c. What is the market-clearing wage with open borders? d. How much is the immigration surplus when the United States opens its borders? e. How much surplus is transferred from Arizona workers to Arizona firms? f. Now assume that low-skilled immigrants are complements to high-skilled (college educated) native workers. What do you expect to happen to equilibrium wages and employment for college educated native workers as a result of immigration? Why? Illustrate your explanation with a graph. 2. Debbie is about to choose a career path. She has narrowed her options to two alternatives. She can either become a marine biologist or a concert pianist. Debbie lives two periods. In the first, she gets an education. In the second, she works in the labor market. If Debbie becomes a marine biologist, she will spend $15,000 on education in the first period and earn $472,000 in the second period. If she becomes a concert pianist, she will spend $40,000 on education in the first period and then earn $500,000 in the second period. a. Suppose Debbie has a 5 percent discount rate between periods. Which career will she pursue? What if she had a 15 percent discount rate? Will she choose a different option? Why? b. Suppose musical conservatories raise their tuition so that it now costs Debbie $60,000 to become a concert pianist. What cancer will Debbie pursue if the discount rate is 5 percent?Text Problem 3de Question Help Assume that you are a U.S. investor. The nominal return on a U.S. bond is 3%% and the nominal return on a German bond is 9%. Both bonds mature in one year. The current exchange rate is 0.79 (/S. If uncovered exchange rate parity holds, you would expect the exchange rate a year from now to be 0.84 6/$. (Round your response to two decimal places.) As a U.S. investor you exchange dollars for euros and purchase the German bond today. One year from now, it turns out that the exchange rate, E, is actually 0.74 (1 dollar = 0.74 euros). Your realized return in dollars is 31.15 %. (Enter your response as a whole number.) Investing in the U.S. bond would have yielded %. (Enter your response as a whole number.)