The questions in this problem refer to the following game: Player 2 a. Determine if either player has any dominated strategies. If so. identify them. b. Does either player have a dominant strategy? 1Why or why not? c. Use iterated elimination of dominated strategies to solve this game. Be clear about order in which you are eliminating strategies. Also specify whether you are eliminating strictly or weakly dominated strategies. (2p) Problem 1. Behavioral economics a} Explain the law of small numbers. b) What is loss aversion? c) How does loss aversion differ from risk aversion? Describe using pictures ofu functions. d) What is time inconsistency? Give an example. Problem 2. Behavioral economics Lisa Late has to finish a project in three days. The total amount of time that she has t: spend nishing the project is 12 hours. Lisa's preferences over working time over the three days can be described by the following utility function: u_ xf El 5x?+1 0,25 A where x: is the number of hours she spends on the project day t. As you can see. work day t has a higher cost than working day H1 and t+2. (5 p) a} 0n the first day (Monday) Lisa makes a plan for finishing the project that main her Monday utility function: u = x: 0.5x? 0.2m: . subject to the constrai 12 working hours in total xmxxw. How many hours does Lisa plan to wot day? b) Lisa spent 12!? hours working on the project on Monday. (in Tuesday morning utility function is: u = xf max: 0,25 x; . Since she must finish the projeci before Thursday she will set xTh=Dand her utility function to be maximized is th of = x3 0.51:: , subject to the budget constraint xxw=i 2-(1 2f?) How man: do Lisa plan to work each day?I c) Given your answers in question a and b, does Lisa have time-consistent prefer: Explain. 5) Explain the similarities/difference between Cournot competition and Bertrand competition. What are the key assumptions/results of each? 6) Explain the following statement: "If firms are competing in quantities, then it pays to be the first to the market. However, if firms arte competing in price, its worthwhile to wait for your opponent to make his move" 7) What is the chain store paradox? What is the major lesson we get from this game? 8) Suppose that the probability of getting in an accident is 3%. The average cost of an accident is $100,000. Suppose that the average car driver has preferences given by U(1) = JI a) Assuming that this individual earns $100,000 per year in income, calculate his expected utility if he buys no insurance. b) Calculate the cost of this policy for the insurance company. c) Suppose that half the population was made up of unsafe drivers (i.e. with a higher accident rate). How high would the unsafe driver's accident rate have to be for this market to break down? d) Explain how moral hazard and adverse selection are dealt with in the insurance industry. 9) Suppose that the market demand is described by P =120-(0+q) Where O is the output of the incumbent firm, q is the output of the potential entrant and P is the market price. The incumbent's cost function is given by TC(Q) = 600 While the cost function of the entrant is given by TC(Q)=60q +80 (80 is a sunk cost paid upon entering the market) a) If the entrant observes the incumbent producing O units of output and expects this level to be maintained, what is the equation for the entrant's residual demand curve? b) If the entrant maximizes profits using the residual demand in (a), what output will the entrant produce? c) How much would the incumbent have to produce to keep the entrant out of the market? At what price will the incumbent sell this output?Problems 1. A monopoly faces a market demand curve given by P = 42 - Q. Its marginal cost curve is given byMC = Q. a. What is the equation for the marginal revenue? Show this on a graph. Find the profit-maximizing level of production for this monopolist. What price will the monopolist charge? What price and quantity would be socially optimal? What is this monopolist' s total revenue? Graph the producer surplus, the consumer surplus, and the deadweight loss for the market with the monopolist. rhopur!!!' 2. True or False: A monopolist can always make a positive prot. 3. True or False: A firrnin perfectly competitive market will always earn zero economic profit. 4. Suppose a monopolistic local utility company faces a demand curve givenby P = 120 - 4Q. Total cost for this rm is given by TC = 400 + 41.1. and MC is fixed at $4 per urlit. a. Does the technologyr of a firm represent economies of scale? b What is the fixed cost? Does this indicate high barriers to entry? c What is the socially optimal level of production and price? d. Suppose this industry operates as amonopoly. Find the equilibrium price and quantity. e. The government, bowing to public pressure to regulate monopolies, decides to nrce rms to charge their marginal cost just like they would in perfect competition. How much will the monopolist produce? What is the profit for this monopolist? f. Suppose the government instead chooses to force the monopolist to charge a price equal to their average total cost, this monopolist will supply 25 units. What will be their prots? ECON 101: Principles of Microeconomics - Discussion Section Week 12 TA: Kanit Kuevibulvarlich Practice Questions for Midterm 2 1 Demand-su l and International Trade Montrovia is a small. closed economy that produces tires The domestic demand and domestic supply of tires in Montrovia is given by the following equations where P is the price per unit and Q is the quantity of tires: Domestic Demand: P = 500 - {5f1000}Q Domestic Supply: P = 100 + {If 500]Q You are also told that the world price for tires is $1.50 per tire. Suppose Montrovia opens its tire market to international trade while simultaneouslyr the government of Montrovia implements a tariff that raises the price per tire to $130. Holding everything else constant, the amount oftariff revenue the government earns from this tariff will equal? a. $511,000 b. $16,111] c. $2,330,000 d- $143me 2} Elasticity Which of the following statements is false? a. If Andrew's income elasticity of demand for good X is equal to zero, Andrew's demand for good X would not be affected if he suddenlyloses his job. b. For Mary, honey is a substitute for sugar. Then. her cross-price elasticity of demand for honey and sugar must be positive. c. The lntemet has made it easier for people to search for a large number of products on websites like eBay and Amazon. This should result in a higher price elasticity of demand for many goods. cl. For John. apples are an inferior good. Then, his income elasticity of demand for apples must be positive. 3} Elasticity and Taxation The market for telephones is in equilibrium when the government decides to levy an excise tax of $5 per telephone on consumers. If at the irlitial equilibrium point consumer demand is inelastic and producer supply is urlit elastic, which of the following could describe the tax incidence? Consumers pay HIT}: of the tax incidence. Consumers pay 2094': and producers pay 80% of the tax incidence. Consumers pay 00% and producers pay 20% of the tax incidence. . Consumers pay 0% of the tax incidence. an .u's