NAME:

ECON 405 - Sample Exam 1 - Spring 2009

You have 1 hour and 15 minutes to answer 2 problems, 2 multiple-choice questions,

and 10 short answer questions. Please be brief and to the point. Good luck!

PROBLEMS:
Problem 1: A market with demand Q = 10 − p is supplied by a monopoly with
costs C(Q) = 6 + 2Q. Calculate the equilibrium price, output, and monopoly
profits. What would be the equilibrium if the market were supplied competitively
by firms, and each firm had the same costs? Illustrate on a diagram, showing the
monopoly and competitive outcomes (price and quantity), monopoly deadweight
loss, and monopoly profit.

Problem 2: An industry consists of a dominant firm with costs C(Qd) = Qd

and 8 identical fringe firms, each with costs c(q) = 1 + q 2 . Market demand is
Q = 10 − p.
1. What is the supply schedule for a fringe firm in the long run? Sketch the
supply. (You would need MC and AC)
 2. What is the total supply of the fringe?

3. Derive the residual demand for the dominant firm. Sketch the demand,
supply of the fringe, and the residual demand.

4. Suppose, the dominant firm chooses to allow fringe to produce. What are
the equilibrium price and output of each of the firms?

5. Suppose, the dominant firm chooses to drive fringe out of the market by
pricing low enough. How low should its price be? (See your answer in 1.)

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 6. Does it pay the dominant firm to induce the fringe’s exit? (Compare the
dominant firm’s profits in 4. and 5.)

7. What is the market outcome if there is free entry of fringe firms. Illustrate
on a graph, showing the residual demand of the dominant firm.

MULTIPLE CHOICE QUESTIONS:

1) Which of the following models result in the greatest deadweight loss assum-
ing a fixed number of firms?
A) Monopoly
B) Cournot
C) Perfect Competition
D) Stackelberg

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 2) If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is
constant at 16, then the firm’s Lerner Index equals
A) 42/58.
B) 16/42.
C) 58/42.
D) 58/16.

SHORT ANSWER QUESTIONS:

Question 1: How is the contestability theory reflected in the Horizontal Merger
Guidelines?

Question 2: Why do firms merge? Do mergers reduce or increase social welfare?

Question 3: Suppose you have to decide whether to use structural or conduct

remedies (break up a company or put restrains on its behavior). What are the
factors that will affect your decision? List some of the problems with the two
kinds of remedies.

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Question 4: If monopoly is “bad,” why would it not be illegal per se? Define
“bad” and list reasons for and against monopoly.

Question 5: What can constitute an entry barrier? How can a firm strategically
create an entry barrier?

Question 6: In rejecting the proposed merger between Coca-Cola and Dr Pepper,

the FTC defined the relevant product market as carbonated soft drinks. How did
Coca-Cola define the relavant market? Do you agree with the FTC’s or Coca-
Cola’s market definition? Why or why not? What was the FTC’s reasoning
in proposing and defending their market definition? Do you think the Court’s
decision would have been different had the relevant product market been found
to be “portable beverages?” Explain.

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Question 7: Some monopolies are regulated, some are illegal, and some are
created. Give an example of each from any market or industry.

Question 8: A log-linear specification was used to estimate a LR cost function

for electric utilities.
Estimation revealed the following:
Ln TC = .04 + 1.1 Ln W + 1.05 Ln R + 0.74 Ln Q
(.01) (.24) (.33) (.03)
where W=wage rate, R=cost of capital, Q=output; parentheses contain stan-
dard errors. What does the regression analysis suggest about returns to scale?
Explain.

Question 9: Is Microsoft an illegal monopoly? Support your answer with argu-

ments. What needs to be established in proving the Microsoft’s monopolization
case under Section 2 of Sherman Act?

Question 10: Why e-markets may or may not be perfectly competitive? Examine
the assumptions of perfectly competitive markets in application to online markets.