Professor Katie FitzpatrickFinal, Spring 2015, Version 2Page 11. (6 Points) Suppose that AmazonFresh

Professor Katie FitzpatrickFinal, Spring 2015, Version 2Page 11. (6 Points) Suppose that AmazonFresh and Peapod compete in the online grocery deliverybusiness. Both firms are considering entering the Chicago market and offering online grocerydelivery in Chicago, IL. The payoffs are as follows:•If both companies enter the Chicago market, next year AmazonFresh earns $400 millionin profit and Peapod earns $200 million in profit.•If neither company enters the Chicago market, next year AmazonFresh earns $360million in profit and Peapod earns $200 million in profit.•If AmazonFresh enters the Chicago market and Peapod does not enter the Chicagomarket, next year AmazonFresh earns $450 million in profit and Peapod earns $225million.•If AmazonFresh does not enter the Chicago market and Peapod enters the Chicagomarket, next year AmazonFresh earns $350 million in profit and Peapod earns $250million.Complete the payoff matrix to answer the following questions:AmazonFreshEnter ChicagoDon’t Enter ChicagoEnterChicagoPeapodDon’t EnterChicagoa) (2 Points) Indicate the dominant strategy – if any – for AmazonFresh and Peapod:AmazonFreshPeadpod =b) (2 Points) What is the Nash Equilibrium of the game?c) (2 Points) The repeated interaction of people and firms in the real world leads to morecooperation than economists would predict in the standard prisoner’s dilemma._________.A. True.B. False.PointsEarned:Professor Katie FitzpatrickFinal, Spring 2015, Version 2Page 22. (10 Points) Sunny weather is here and it’s time to garden! The graphs below depict theperfectly competitive seed market and a representative firm, Sid’s Seeds.Sid’s SeedsThe Seed Market$8$8$7$7$6MCATC$5$6$5$4$4$3S$3AVCq140012001000800600400200D02422201816141210$08$06$14$12$20$2Qa) (2 Point) The market equilibrium price is ____ and the market equilibrium quantity is _____.b) (2 Points) In the short-run, each firm produces at q=_____.c) (2 Points) On the graph, shade in the firm’s profits.d) (4 Points) Explain what will happen in the long-run by describing the full market adjustmentprocess. Provide specific numbers for the number of firms in the industry in the long-run,the long-run market equilibrium price, and the long-run market quantity.PointsEarned:Professor Katie FitzpatrickFinal, Spring 2015, Version 2Page 33. (10 Points) Many patients need blood transfusions. Below is the daily market for blood. In theUS, the Food and Drug Administration (FDA) is responsible for ensuring the safety of the bloodsupply. FDA rules say that blood for transfusions cannot be bought, thereby ensuring a priceceiling of $0.P30KFA2520GB15JEL105MDCIH0020406080100120140160Quantitya) (1 Point) Show the effect of the price ceiling by clearly labeling on the graph:o Quantity Supplied after the price ceiling, QS.o Quantity Demanded after the price ceiling, QDb) (1 Point) After the price ceiling, there is a _____________ of ___________ units of blood.c) (6 Points) For each item below, indicate the corresponding area(s) from the graph:1)Consumer Surplus, before the FDA Rule2)Producer Surplus, before the FDA Rule3)Total Revenue, before the FDA Rule4)Consumer Surplus, after the FDA Rule5)Producer Surplus, after the FDA Rule6)Total Economic Surplus, after the FDA Ruled) (2 Points) Does the FDA Rule make the market more or less equitable? Defend your answer.PointsEarned:Professor Katie FitzpatrickFinal, Spring 2015, Version 2Page 44. (25 Points) Suppose only two firms – Spotify and Pandora – provide streaming music servicesand they behave like a duopoly. The market demand for streaming music services is depicted onthe graph below. Assume neither firm has fixed costs and the average variable costs are aconstant $4.Price (per month)$25Market for Streaming Music Services$20$15$10$5DemandQuantitya) (4 Points) Suppose Spotify and Pandora successfully collude as a cartel and split output andprofit evenly. Indicate the following:Price Charged by Spotify:Quantity Produced by Spotify:Price Charged by Pandora:Quantity Produced by Pandora:b) (3 Points) On the graph above, clearly indicate the Total Profits of the Industry.c) (4 Points) Is the market efficient? Explain why or why not. Indicate any inefficiency on thegraph.d) (4 Points) Assume Spotify and Pandora engage in a price war. The long-run equilibrium is:Price Charged by Spotify=Quantity Produced by Spotify=Economic Profits of Spotify =12,00011,50011,00010,50010,0009,5009,0008,5008,0007,5007,0006,5006,0005,5005,0004,5004,0003,5003,0002,5002,0001,5001,0005000$0Deadweight Loss in the Market=PointsEarned:Professor Katie FitzpatrickFinal, Spring 2015, Version 2Page 5e) (4 Points) Examine the Consumer Surplus in the market when the duopolists are colludingand after the price war. Explain the two reasons that Consumer Surplus changes:1)2)f) (2 Points) To many consumers, mobile phones and streaming music services arecomplements. If the price of mobile phones were to rise, the price charged when Spotify andPandora collude would: _______A. RiseB. FallC. Stay the sameg) (4 Points) Yesterday, the attorneys general of Connecticut and New York announced theywere opening an antitrust investigation regarding Apple’s dealings with music companies forApple’s new subscription music service. The attorneys general wanted to know whetherApple pressured the music companies — or whether the companies conspired with Appleand one another — to stop supporting free streaming services in favor of paid streamingmusic services.The Attorney General of New York released a statement saying, in part that “the attorneygeneral was looking into Apple’s negotiations with music labels to preserve the benefitsconsumers have enjoyed from these new streaming services. “It’s important to ensure that themarket continues to develop free from collusion and other anticompetitive practices.”Why is it important that a market develop from free collusion?PointsEarned:Professor Katie FitzpatrickFinal, Spring 2015, Version 2Page 6Price5. (22 Points) Deforestation is a problem around the world. Logging of trees for lumber damagesrecreational areas, erodes the soil, and eliminates wildlife habitats. But, wood from this lumber isneeded to build houses, decks, and other structures. The market for lumber has the followingsupply (private marginal cost) and demand (private marginal benefit). Assume that theproduction of each piece of lumber causes $15 in marginal damage to society.$80Market for Lumber$70$60$50S$40$30D$20$10Quantitya) (2 Points) Label the Social Marginal Benefit (SMB) and Social Marginal Cost (SMC) curves.b) (4 Points) Indicate the following:Price set in Private Market=Quantity set in Private Market=Socially efficient Price=Socially Efficient Quantity =c) (2 Points) The appropriate Pigouvian tax would a tax = _________.d) (3 Points) After implementing the appropriate Pigouvian tax, label the following on thegraph:• Price Buyers Pay (PB)• Price Sellers Receive (PS)• Tax Revenue (TR)e) (2 Points) What is the economic incidence of the appropriate Pigouvian Tax?PointsEarned:1,5001,4501,4001,3501,3001,2501,2001,1501,1001,0501,000950900850800750700650600550500450400350300250200150100500$0Professor Katie FitzpatrickFinal, Spring 2015, Version 2Page 7f) (2 Points) What is the Deadweight Loss in the market after the Pigouvian Tax? Explain.g) (2 Points) Assume that the US emerges from a recession and consumer income rises. On thegraph below, show what will happen to the private market for lumber. (Note: No specificprice or quantity is required, but please indicate the direction of the effect.) Describe youreconomic reasoning, including any assumptions you are making about the market for lumber.EconomicReasoning:Price$80Market for Lumber$70$60$50$40S$30$20D$101,5001,4001,3001,2001,1001,0009008007006005004003002001000$0Quantityh) (2 Points) After consumer income rises, at the quantity chosen by the private market, will thetotal value of damage to the environment change? Explain.i) (3 Points) Assume an engineering firm found a way to reduce the marginal damagesassociated with logging. With the engineering firm’s approach, the marginal damagesassociated with logging are $10 per each piece of lumber (rather than $15). However, thePigouvian Tax you suggested in part c) remains in place. Explain how that would change theresults for the tax you implemented earlier. Be sure to address the prices buyers pay andsellers receive, the tax revenue, and efficiency of the market.PointsEarned:Professor Katie FitzpatrickFinal, Spring 2015, Version 2Page 8$210$200$190$180$170$160$150$140$130$120$110$100$90$80$70$60$50$40$30$20$10$0Market for CelebrexATC2,0001,9001,8001,7001,6001,5001,4001,3001,2001,1001,000900800700600500400300200100Demand0Price6. (10 Points) Pfizer, one of the largest pharmaceutical companies enjoyed large accountingprofits in recent years. One reason for this was that it owned the patent to Celebrex, a drug toreduce joint pain caused by arthritis. The Marginal Cost per unit of Celebrex is a constant $20.Quantity (in Thousands)a) (1 Point) Draw in the Marginal Cost curve.b) (2 Points) What is the profit-maximizing price and quantity?Price=Quantity=c) (2 Points) Explain why this outcome may be good for Pfizer but bad for society.d) (2 Points) Acupuncture is another way of treating arthritis. Assume acupuncture and Celebrexare substitutes. If the price of acupuncture falls, the price of Celebrex would: ______.A. FallB. RiseC. Stay the same.e) (3 Points) If Pfizer could perfectly price discriminate, provide the following_Quantity=Consumer Surplus=Deadweight Loss=PointsEarned:Professor Katie FitzpatrickFinal, Spring 2015, Version 2Page 97. (8 Points) One hundred people want to purchase unemployment insurance. They include:• 20 people with a high probability of losing their job, each willing to pay $6,000• 60 people with an average probability of losing their job, each willing to pay $4,000• 20 people with a low probability of losing their job, each willing to pay $750The insurance company does not know the probability that anyone will lose their job. They doknow that 20% of people will have a high probability of losing their job and cost $5,000 each;60% of people will have an average probability of losing their job and cost $3,000; 20% ofpeople have a low probability of losing their job and will cost $500.a) (2 Points) What is the actuarially fair price of unemployment insurance?b) (2 Points) If they charge the actuarially fair price, the insurance company’s profits are ____.A. PositiveB. ZeroC. Negativec) (4 Points) Is this an efficient outcome? Explain using appropriate economic terms andreasoning.PointsEarned:Professor Katie FitzpatrickFinal, Spring 2015, Version 2Page 1011. (10 Points) Consider the market for cotton t-shirts. The market in the US is depicted below:$25$24$23$22$21$20$19$18$17$16$15$14$13$12$11$10$9$8$7$6$5$4$3$2$1$0US T-Shirt MarketSupplyANLIa) (3 Points) If the world price was $9 and the U.S. trades with the rest of the world, indicate thefollowing area(s) from the graph:1. Consumer Surplus: _______________2. Producer Surplus: ________________3. Gains from Trade: ________________b) (2 Point) If the world price was $9 and the U.S. puts a $2 tariff on imports of T-Shirts,consumer surplus will be _________ than the consumer surplus under free trade.A. largerB. smallerc) (2 Points) Clearly shade in the Deadweight Loss on the graph when the world price is $9and the U.S. places a $2 tariff on imports of T-Shirts.d) (3 Points) How much would advocates of the $2 tariff be willing to pay to put the tariff inplace? Show your work.PointsEarned:20001900180013001200Demand11001000900800700JHG600500400300200100FK1700MEQPO1600DR1500C0ST1400BSection III. Multiple Choice (2 Points Each)For the first two questions, the following table provides the U.S. market share of the major carmanufacturers. Use the table to answer the next two questions.General MotorsFord Motor CompanyToyota Motor SalesChrysler LLCHonda Motor CompanyNissan Inc.Hyundai MotorsMazda MotorsAll Other CompaniesMarket Share20%17%13%10%10%8%5%2%15%1. Using the above information, the HHI in this market is currently:A. 20 + 17 + 13 + 10 + 10 = 70B. 202 + 172 + 132 + 102 + 102 + 82 + 52 + 22 + 152 = 1,376D. (20 + 17 + 13 + 10 + 10)2 = 5,6002. A merger of Honda and Hyundai would change the HHI to:A. 20 + 17 + 13 + 10 + (10 + 5) = 75B. 202 + 172 + 132 + 102 + (10+5)2 + 82 + 22 + 152 = 1,476C. (20 + 17 + 13 + 10 + (10+5))2 = 5,625D. It would have no effect.3. A perfectly competitive firm is a:A. Price-taker.B. Price-searcher.C. Cost-maximizer.D. Quantity-taker.4. The absolute value of the price elasticity of demand for coffee is 0.25. This means coffee is:A.B.C.D.An inferior good.A normal good.An inelastic good.An elastic good.5. As discussed in the podcast “Your Doctor is Like a Mechanic” and in class, asymmetricinformation prevents the health care market from working like any other market.A. True.B. False.Professor Katie FitzpatrickFinal, Spring 2015, Version 2Page 126. A monopolist will ______ and _____ than a perfectly competitive firm.A. produce more; charge moreB. produce less; charge moreC. produce more; charge lessD. produce less; charge less7. Some costs do not vary with the quantity of output produced. These areA.Marginal costsB.Fixed costsC.Explicit costsD.Average costs8. According to the podcast “Mavericks, Monopolies, and Beer” and discussed in class, amaverick is aA. A small company that does not profit maximize.B. A small company that is essential for keeping a market competitive.C. A small company that does not exit the market even when profits are negative.D. A small company that price discriminates.9. Which of the following is an example of moral hazard?A. many individuals listen but do not donate to public radio.B. healthy individuals are priced out of insurance markets.C. doctors are more likely to prescribe a medication when a drug company providesthem free samples of medications.D. Individuals with renters insurance are more likely to leave their doors unlocked.10. Which of the following is a type of firm that cannot price discriminate?A. MonopolyB. Natural Monopoly.C. Perfectly Competitive Firm.D. Duopoly.PointsEarned:Four “Free” Points for Completing!I found this Exam: ______A. Incredibly DifficultB. Difficult but ManageableC. Not too DifficultD. Very EasyI spent ___________ hours studying for this Final.I found Econ 2110: ______A. Incredibly DifficultB. Difficult but ManageableC. Not too DifficultD. Very EasyThis quarter, outside of lecture, I have spent an average of ___________ hours a week on Economics2110 reading and coursework.Professor Katie FitzpatrickFinal, Spring 2015, Version 2Page 14Directions:1. DO NOT turn over the Final until told so.2. All cell phones must be turned OFF. ANY sound arising from your phone will receive a 5point penalty.3. You have 1 hour and 50 minutes to complete the Final4. The Final is worth 125 Points towards your Final Grade.5. You may NOT leave the room during the Final.6. You do not NEED a calculator but you may use one.7. Please use a straight edge so you can draw straight lines.8. Complete multiple choice questions by placing the letter on the line provided.Print Name _________________________________________I have abided by the Seattle University Academic Integrity Standards during this exam.SignaturePointsEarned: