[Lord GVChamp]

I figure this might be interesting

This is the sample final (the real one is on Tuesday and will likely be more difficult)

On the real test, one would pick 5 of the questions to answer


1. How is the price of electricity set in a regulated electricity industry? How is the
price determined in a deregulated electricity industry? What time of day and what
time of year is electricity demand the highest? How do firms recover the cost of
building a new plant in a deregulated market?



2. Suppose there are many fast food restaurants in a neighborhood. The industry is in
long run equilibrium when half the residents of the neighborhood suddenly decide
to go on a diet. What is the effect on prices and the number of restaurants in the
short run and long run?



3. In a private health insurance market, many healthy people would like to purchase
health insurance, but decide the price is too high. As a result, they do not have
insurance. Why does this happen?



4. What is the prisoner’s dilemma? How does it relate to firms’ ability to collude?




5. In the Cournot model with free entry and a homogeneous product, are there too
many or too few firms? What about with a heterogeneous product?



6. If mergers tend to reduce competition, why might some mergers increase social
welfare?



7. Why are ticket prices much lower for many flights if you buy them in advance?
Why are economy class seats on airplanes so much less comfortable than first
class?



8. In second degree price discrimination with two types of consumers, does the high
type have positive consumer surplus? What about the low type? How does this
differ from first degree price discrimination?



9. What is the definition of a markup? Compare markups in a perfectly competitive
industry, an oligopoly with a homogeneous product and no entry or exit, and a
monopoly (assume the three industries have the same demand curves). What is
the relationship between the markup and social welfare?

[Kenadian_2006]

I refuse to touch economics exams with a ten foot poll.

[Lord GVChamp]

Kenadian_2006, on May 4 2008, 04:12 PM, said:

I refuse to touch economics exams with a ten foot poll.

I'll eventually post the answers, if that makes you feel any better

[Arcturus Jefferson]

Aww man, I took microecon like two semesters ago. I remember so little. Course, not all of the things here were covered...

[Xiao Weng]

3. Insurance, especially health insurance, works by pooling potential risk and using the proceeds from the premiums to pay out the claims when the claims arrive. The more people paying premiums, the more the risk is spread around and the better the insurance company does. Risk is assessed on many different factors, including but not limited to age, gender, weight, current health, and medical history. However, the private health insurance market does not lend itself well to lowering prices due to the rising cost of health care. One way insurance companies can lower premiums is by offering a preferred premium cost to a specific risk pool, such as a company of employees. From the question itself, these people are not pooling together but are single insureds attempting to buy a personal plan so the risk is much higher. As a result, they find the price is too high and they decide to go without. Since the insurance companies have enough risk pools from companies and large corporations, they have little reason to lower the cost of premiums because the cost of health care continues to rise, eating into the profit margin.

That's all I'm looking at for now. Sunday is not for thinking.

[unbiased mod]

I almost thought #1 was electrical question, then it went all and economical

[Lord GVChamp]

unbiased mod, on May 4 2008, 04:36 PM, said:

I almost thought #1 was electrical question, then it went all and economical

Miss the Topic Title, ey?

[kingzog]

I love Prisoners' Dilemma....

If you can't be 100% certain your co-conspirators will back you up, make sure you're the one who "rolls" first.

Awesome.

btw....the answer to #7:

"They only appear to be less comfortable. In fact, persons seated in economy class have long ago lost all feeling below the waist."

*kingzog finally put his Minor in Economics to use

[El Pilchinator]

I will edit in the answers. This is good AP Micro review

Quote

1. How is the price of electricity set in a regulated electricity industry? How is the
price determined in a deregulated electricity industry? What time of day and what
time of year is electricity demand the highest? How do firms recover the cost of
building a new plant in a deregulated market?

In a regulated electricity industry, the price is set by government legislation. In non-regulated electricity industry, the price is set where the market will bear on the demand curve. Mid-day/afternoon is high demand, Summer cooling is my guess for that. I have no idea about the last part.

Quote

2. Suppose there are many fast food restaurants in a neighborhood. The industry is in
long run equilibrium when half the residents of the neighborhood suddenly decide
to go on a diet. What is the effect on prices and the number of restaurants in the
short run and long run?

How many firms? You know what I mean.

The change in a fad will result in the demand curve for the food from these restaurants to shift left. This will lower prices at these restaurants in the short run (unless you are john maynard keynes). As a result, firms will experience economic losses, and unable to cover their variable costs, firms will exit the industry. tl;dr: SR - firm # stays constant, prices down. LR - firm # drops, prices constant.

I think.

Quote

3. In a private health insurance market, many healthy people would like to purchase
health insurance, but decide the price is too high. As a result, they do not have
insurance. Why does this happen?

$%&@ that

Quote

4. What is the prisoner’s dilemma? How does it relate to firms’ ability to collude?

The prisoner's dilemma involves two prisoners being questioned separately and discusses their options of confessing to a severe crime or not confessing to a severe crime and being tried for a lesser crime. There is a specific action, called the dominant strategy, which will always be the best option for them. In an oligopoly, businesses have the option of pursuing two different types of strategies with different payoffs. The two firms can find the option which yields the best payoff for each, which is called collusion.

Quote

5. In the Cournot model with free entry and a homogeneous product, are there too
many or too few firms? What about with a heterogeneous product?

Never learned this

Quote

6. If mergers tend to reduce competition, why might some mergers increase social
welfare?

Quote

7. Why are ticket prices much lower for many flights if you buy them in advance?
Why are economy class seats on airplanes so much less comfortable than first
class?

part a: price discrimination

part b: made in china

Quote

8. In second degree price discrimination with two types of consumers, does the high
type have positive consumer surplus? What about the low type? How does this
differ from first degree price discrimination?

Never learned degrees of price discrimination. The high type, I would assume, entirely eliminate consumer surplus.

Quote

9. What is the definition of a markup? Compare markups in a perfectly competitive
industry, an oligopoly with a homogeneous product and no entry or exit, and a
monopoly (assume the three industries have the same demand curves). What is
the relationship between the markup and social welfare?

Stolen from about.com, its the ratio of price to marginal cost.

The higher the markup, the further the industry is producing from its socially optimal point of P = MC.


I think I got number 2 and 4 right, beyond that I haven't the faintest idea about a lot of this.

This post has been edited by El Pilchinator: 04 May 2008 - 04:49 PM

[Galaisa]

Which level of microeconomics is this?

[El Pilchinator]

Galaisa, on May 5 2008, 09:10 AM, said:

Which level of microeconomics is this?

College level, whatever that means. It's beyond what is taught for AP exams, at least.

[Xiao Weng]

I always thought economy class was less comfy than first class because first class passengers are paying a premium for space and padding. The last 1st class seat I was in wasn't all that different from an economy seat, save that it had extra padding bolted on.

[Ethan Smith]

4. What is the prisoner’s dilemma? How does it relate to firms’ ability to collude?

A prisoners dilemma is when 2 convicts are in a shower, and they're trying to decide who gets to be on top. This dilemma is normally solved vis a vis a coin toss.
I don't know what colluding means, but it also sounds sexual.

[Lord GVChamp]

Answers:

1. In a regulated market, the regulator sets the price equal to the firm’s average
costs. In a deregulated market, the price varies over time and is determined by
the intersection of the supply and demand curves. Demand tends to be highest
during late afternoon/early evening, and is generally higher in summer than
winter (although the seasonal difference depends on climate). In a deregulated
market, firms recover sunk costs over the lifetime of the plant, during hours
when the plant is operating and the price is greater than average variable costs.

2. The increase in dieting reduces the demand for fast food. The number of firms
is fixed in the short run. Each firm’s residual demand curve shifts in, which
cases marginal revenue to shift in. Each firm decreases output and price, so
the market price decreases. Firms earn negative profits in the short run, so
there will be exit. The number of firms decreases in the long run and the price
returns to the original level (the price is the same as the initial equilibrium
because the cost curves haven’t changed, so the point of tangency between
RD and AC doesn’t change).

3. Incomplete information is the cause. The insurance company doesn’t know
the expected cost of insuring each person, and has to charge the same
premium to everyone. This is a good deal for people with high expected costs,
but a bad deal for people with low expected costs, and many of the latter
decide they are better off without insurance.

4. The prisoner’s dilemma refers to a situation in which the Nash Equilibrium is
not the optimal equilibrium for the firms. In the single-period Cournot model,
firms would be better off if they can collude, but colluding is not a Nash
Equilibrium (collusion may be a Nash Equilibrium in a multi-period model, as
we discussed in class). Both firms are better off increasing output if the other
firm attempts to collude.

5. With a homogeneous product there is too much entry because of the business
stealing effect. Society would be better off if there were only one firm (as long
as that firm charges the same price as in the Cournot equilibrium) because
only one firm would have to pay the fixed costs. With a heterogeneous
product, however, there may be too few firms. Society loses because of the
same duplication of fixed costs argument, but if consumers love variety, an
increase in the number of firms could increase social welfare. It is generally
uncertain which effect is bigger.

6. The reduction in competition tends to lead to higher prices, which reduces
social welfare. On the other hand, if the merger reduces costs, the price level
could decline.

7. The first situation refers to third degree price discrimination, and the second
refers to second degree. In the first case, the airline assumes that people who
buy tickets far in advance have lower/more elastic demand, and charges them
a lower price. People who buy at the last minute tend to have higher/more
inelastic demand, and the firm charges a higher price. In the second case, the
firm is trying to discourage the “high� type from flying economy class by
making economy much less comfortable. This allows the firm to charge a
higher price for first class.

8. With first degree price discrimination, the firm extracts all consumer surplus.
With second degree, the low type has no consumer surplus. The high type has
positive consumer surplus, but is indifferent between the two price schedules.

9. The markup is the percent difference between price and marginal cost, or (P –
MC)/P. In a competitive market P = MC so the markup is zero. The markup is
greatest in a monopoly, as the equilibrium price is higher than in an oligopoly.
In this case, the markup is inversely related to social welfare.

[auto98]

Lord GVChamp, on May 4 2008, 10:18 PM, said:

1. How is the price of electricity set in a regulated electricity industry? How is the
price determined in a deregulated electricity industry? What time of day and what
time of year is electricity demand the highest? How do firms recover the cost of
building a new plant in a deregulated market?

re an earlier answer - the maximum price may be set, not necessarily the actual price. (regulated)

Quote

2. Suppose there are many fast food restaurants in a neighborhood. The industry is in
long run equilibrium when half the residents of the neighborhood suddenly decide
to go on a diet. What is the effect on prices and the number of restaurants in the
short run and long run?

If there are lots of fast food restaurants, there is no long run in that area

Quote

3. In a private health insurance market, many healthy people would like to purchase health insurance, but decide the price is too high. As a result, they do not have insurance. Why does this happen?

Because they decided not to buy? Oddly worded that since the question appears to be asking why they don't have insurance, when it has already answered that in the question

Quote

7.
Why are economy class seats on airplanes so much less comfortable than first class?

It is to do with the material the seat is made from, along with the type of stuffing O_o

This post has been edited by auto98: 08 May 2008 - 10:58 AM