University of Texas - Arlington

ECON 2306 Fall 2015

Dr. Todd Gabel
Final Exam
SHORT ANSWER. Each question is worth 5 points. If you leave an
answer blank, you will receive 2 points. If you provide a bad answer,
you may get zero. You will be rewarded on the quality of your answers,
not by the sweat of your brow. If a question strikes you as ambiguous,
make some assumptions, and be explicit about them. Be concise. Your
answers must be contained to this page.
1. Suppose there are two firms, Firm 1 and Firm 2, who are currently
acting in a competitive manner. Suppose further they have the option
of colluding, where both firms agree to raise prices on their customers.
Let each firm have two strategies - price their goods high (H) or price
them (L). Let the payoffs for each firm be given by the diagram below:
FIRM 1

FIRM 2
H

$100, $100

$50,$150

$150, $50

$60,$60

(a) Solve the game for any Nash equilibria. Show your work. (3 points)

(b) Comment on your answer in (a). (1 point)

(c) Do you think your answer to (a) would change if the firms were
located right across the street from one another? Why or why not? (1
point)

2. Consider the housing market described by these equations:

Qd = 22 2P
Qs = 1 + P
(a) Graph the supply and demand curves for housing. (1 point)
(b) Find the equilibrium price and quantity, either graphically or
algebraically. (1 point)
(c) Calculate or show the consumer and producer surpluses. (1 point)
(d) Suppose a rent control price of $6 is imposed. Find the new
equilibrium price, quantity demanded, and quantity supplied. (1 point)
(e) What is the new consumer and producer surpluses? What is the
deadweight loss (1 point)

3. Suppose a movie theater is able to act like a price searching firm.

The demand it faces for movies is given by P = 41 - 2Q and its total
costs are given by TC = 20 + Q.
(a) Write down equations for the firm's MR, ATC and MC curves. (1.5
points)
(b) Graph these three equations and the demand curve. (1.5 points)
(c) What is the optimal price and level of output? (1 point)
(d) What are the firm's profits at this level of output? Show this on your
graph. (1 point)
BONUS:
By comparison, show on your graph the perfectly competitive price
and level of output. In one sentence, how might a price searching firm
(like a monopoly) be different than a perfectly competitive industry in
terms of efficiency? (1 point)

4. A story reads:
"Bobby Bonilla is 52 years old and hasn't played major league baseball
since 2001. But the New York Mets will pay Bonilla $1.2 million today in
the latest installment of what many consider one of the worst deals in
sports history. Following the 1999 season, the Mets wanted to buy out
the final year of Bonilla's contract. But instead of paying him the $5.9
million he was owed, the two sides agreed to a deferred compensation
deal with the Mets paying Bonilla 25 annual payments of $1.2 million
starting on July 1, 2011."
All told, the Mets will have to pay Bonilla close to $30 million, which is
about five times what he would have been paid when they bought out
his contract.
Do you agree that this is a bad deal for the Mets? Explain why or why
not.

5. Joe tells of the following story:

"I bought a couple of rare compact discs for $5 each from a local flea
market. The guy obviously didn't know what they were worth as it was
priced the same as his other discs. I actually told him that they are
worth a lot more than what he was asking. I don't know if he thought I
was messing with him but he snarkily replied: 'Mate, you're welcome
to pay me more if you want to.'"
What economic idea do you think Joe is getting at here, relating to how
he ends up paying less than the compact disc is worth to him? If Joe
actually ended up paying more for the compact discs, do you think his
actions would be consistent with our principle of maximization?
Explain.

6. Hillary Clinton recently observed:

Far too many women are denied access to reproductive health care
and safe childbirth, and laws dont count for much if theyre not
enforced. Rights have to exist in practice not just on paper.
How might this comment fit into our theories on property rights?
Explain in two or three sentences.

7. Suppose a marital relationship is described by the following

preferences:
Husband

Wife

Married

40

30

Divorced

15

50

(a) What does the Coase Theorem predict will happen to this
relationship under Fault divorce? Explain.

(b) What about under No Fault divorce? Comment.

(c) Would your answer to (a) or (b) change if it costs 10 to initiate a

conversation (bargain) with their spouse? Why or why not.

8. In the early 1900's a US political group called the Socialist Party was
founded. In 1912, the Socialist Party political platform called for,
among other things:
"The extension of the public domain to include mines, quarries, oil
wells, forests and water power.
As it happened, the political party had only limited success, with its
Presidential candidates getting just 6 percent of the electoral vote.
Judging the party by this policy alone, do you think the Socialist Party
would have managed to fulfill one of its other platforms, which was
increasing the prosperity of America? Explain.

9. Black Friday is a sale whereby, the day after Thanksgiving stores

frequently reduce their prices dramatically, sometimes below cost. This
often causes large lineups to form, as people can wait for hours in line
before the store opens. Why don't firms simply offer low prices all the
time, and save on all the added costs from putting on such a sale advertising costs, overtime shifts, higher loss of merchandise from
theft, and so forth?

10. In the movie "Bus Stop" a young cowboy named Bo seeks the
affections of an attractive lounge singer, named Cherrie, played by
Marilyn Monroe. In one scene, the cowboy unexpectedly proposes they
get married:
[BO]
We're getting married tomorrow. We'll be very happy together, till
death do us part For a wedding present I'll get you a deep-freeze or
an electric washer or any other major appliance you want.
[CHERRIE]
We better get something straight. I have no intention in the world of
marrying you. So get it out of your head.
[BO]
We'll talk all that over on the way. You see, the problem is you just
haven't had time yet to get attracted to my mind.
[CHERRIE]
I know all about your mind I ever wanna know.
Do you think Bo's wedding present makes for an effective economic
signal? Explain why or why not.

BONUS. This is a slightly more challenging application question

designed to get you thinking like an economist. It is similar in feel,
however, to the short answer questions above. The question is worth 5
points but there are no points for leaving the question unanswered. Be
concise. Your answers must be contained to this page.
Lyrics from Sheena Easton's song "Double Standard," off of her My
Private Heaven album, go like this:
Don't worry about me, I'll be alright
Go have your fun, stay out all night
But I won't be waiting, I've got someone new to meet
He treats me fifty-fifty, it's a two way street, you're a one way street
How might a relationship not being "fifty-fifty" be an example of one of
the partners earning an economic rent? How might this cause a "one
way street"?