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Economics 2nd Edition Daron Acemoglu - Solutions

Why does adverse selection occur in the health insurance market?
Explain how the second-hand market for heavy equipment in the construction sector could be an example of hidden characteristics.
Give an example of hidden actions. Who is the principal and who is the agent in this case?
Assume the interest rate is 50 percent. What is the present value of a payment of $60 paid 1 year from now? How about the present value of $60 paid today and $60 paid a year from now? Challenge question: What about $60 paid today, plus $60 paid a year from now, plus $60 paid the year after that,
You are a venture capitalist who has just purchased a stake in a small company. You believe that a year from now this company may no longer exist, in which case your stake is worthless; there is an 80 percent chance of this happening. However, there is a 10 percent chance your stake will be worth
Your house is worth $100,000 and you have $50,000 in a savings account. There is a 2 percent chance of a fire in your house. If the fire occurs, there will be $50,000 in damages to your house.a. Suppose you do not have fire insurance. If the fire occurs, you will have to pay $50,000 to repair your
You are considering playing a card game. The rules of the game are such that you pick a card from a standard deck of 52 cards and if the card is a face card (jack, queen, or king), you win $50. The catch is you have to pay the dealer a fee of $10 to play the game. What is the expected value of this
Say whether or not each of the following statements assumes independence between events:a. “There is no such thing as a ‘hot hand’: A basketball player is just as likely to make her next shot regardless of whether she made her last shot.”b. “I notice that when one student scores above
This chapter talked about the idea of independent events.a. Suppose you draw a card from a standard deck of cards, you put that card back in the deck, and draw a second card. Are the events “Draw a diamond the first time” and “Draw a diamond the second time” independent events?b. Suppose
You observe a banker give $75 for a bond that pays out$100 in one year. Based on this observation, what do you conclude about the interest rate? Suppose that the price of this bond today suddenly increases to $80. Now what do you conclude about the interest rate? (Remember even though the price
Stafford loans are student loans that the federal government provides to graduate and undergraduate students to fund their education. Since Stafford loans can be extended up to 30 years, the Congressional Budget Office calculates the cost of these loans by discounting the future cash flows from the
You are considering purchasing a new piece of equipment for your factory. The equipment will cost $1,000 and can be used for three years. If you do purchase it, you will earn $350 one year from now, $385 two years from now, and $435.7 three years from now. After that, the machine will generate no
Suppose you win a grand lottery on January 1, 2015. You can choose to receive the entire amount of $200 million either as a lump sum on January 1, 2015, or you can receive four equal payments of $52 million paid on January 1, 2015, 2016, 2017, and 2018. Assume your lottery earnings are not taxed.a.
Suppose that when you were born, your parents deposited$20,000 in a bank. The bank offers a fixed interest rate of 6 percent. On your eighteenth birthday, your parents decide to withdraw the money that they deposited to pay for your college tuition. How much money can they expect to withdraw?
The “Rule of 70” is a simple way to estimate how long it will take something to double in value: divide 70 by the annual percentage growth rate; the number you calculate is the doubling time, in years. For example, 70/4 = 17.5;thus it takes about 17.5 years for a bank account to double in
Why might it make sense to avoid paying for extended warranties on TVs and small home appliances?
Given a choice between two investments, one with fixed return and the other risky, how would a risk-neutral individual make a decision on which to choose?
What is loss aversion?
Describe an example of an outcome that is not independent.
Is the outcome of tossing a coin a random event? What is the probability of getting a heads? Explain your answer.
What is meant by a preference reversal?
What is meant by present bias?
The present actions of Person A are based more on the future consequences of her decisions than Person B’s actions are. Who has the greater discount weight? Explain your answer.
How is net present value used to decide whether a project should be undertaken?
How is the present value of a future payment calculated?
Is $1,000 received today worth as much as $1,000 received 1 year from now? Explain your answer.
A firm in a monopolistically competitive environment discovers that in the long run it faces inverse demand P = 10 - 11>22Q, which means its marginal revenue is MR = 10 - Q. The firm’s marginal cost is a constant MC = $4.a. Sketch these three curves on a graph.b. Based on the profit-maximizing
Suppose all you know about Boeing and Airbus is that Boeing sells about 40 percent of all comercial aircraft, while Airbus sells around 25 percent.a. Based on this information, what is the largest the Herfindahl-Hirschman Index (HHI) might be? (Hint:Assume there is just one other firm in the
There are six petrol companies in City A, and each charges a different price. Consumers prefer the company that charges the lowest price and this has resulted in price war among the companies. Eventually all the companies join a cartel where each agree to charge the same price but there is concern
How much profit will each country earn if each produces 10 instead of 20?d. Will country A have an incentive to cheat and produce 20 instead of 10? Will country B have an incentive to cheat and produce 20 instead of 10?
Suppose the world demand schedule for oil is as follows:There are two oil-producing countries, A and B. Each will produce either 10 or 20 barrels of oil. To keep things simple, assume they can produce this oil at zero cost.a. There are four possible outcomes: A produces 10 or 20 and B produces 10
Telesource and Belair are two of the largest firms in the wireless carrier market in a certain country. Together, these firms account for more than 80 percent of the market.a. Given that both firms differentiate their products, how is a Nash equilibrium achieved in this market?b. Suppose both
Major league baseball teams have imposed what is commonly called the “luxury tax” on themselves. A team is subject to the tax if its payroll exceeds a specified level.The annual threshold for the luxury tax is $189 million for 2014–16. A team that exceeds the threshold must pay 17.5 to 50
Coke and Pepsi each choose one of two prices: “Low”1P = $22 or “High” 1P = $32. There are 50 buyers who will pick the lowest price option. However, if the prices are the same, 25 will buy from Coke and 25 from Pepsi. For simplicity, assume there are no costs, so profit is just price times
Two cinemas, Golden Sun (GS) and Bright Moon (BM), are located next to each other at a major shopping center.Each of them is contemplating lowering the price of their tickets from $10 to $8 to boost revenue. But each is also concern that the other party will do the same which may defeat the purpose
Make three copies of the following diagram and label them (i), (ii) and (iii). Add three different residual demand curves faced by a monopolist: (i) very steep (inelastic),(ii) relatively flat (elastic), and (iii) horizontal (perfectly elastic). Draw the residual demand such that a monopolist earns
A short-run monopolistically competitive firm has the demand curve P = 20 – 2Q, and the marginal revenue MR = 20 – 4Q. The firm also incurs a constant marginal and average total cost of MC = ATC = $10.a. Determine the optimal output of the firm.b. What is the price at the optimal output?c.
Consider a duopoly with homogeneous products, where two competing firms pick price (Bertrand duopoly). In this chapter you learned that both firms will choose price equal to the marginal cost (MC). But what happens if the the two firms have unequal marginal costs? Suppose that Dogwood has MC = $40
With the growth of the Internet, there are many online retailers and many buyers who shop online.a. Why, given the growth of the Internet, would you expect to find that different firms would charge very similar prices for the same good?b. Despite the logic of the first part of this question,
Acme is currently the only grocery store in town. Bi-Rite is thinking of entering this market. They will play the following game. First, Bi-Rite will decide whether or not to enter. If it does not enter, then the game ends, Acme earns a payoff of 50, and Bi-Rite earns a payoff of 0. If Bi-Rite does
Decide whether each of the following statements is true or false for each of three different types of markets: perfect competition, monopoly, and monopolistic competition.a. Firms equate price and marginal cost.b. Firms equate marginal revenue and marginal cost.c. Firms earn economic profits in the
Suppose the refrigerator industry has an HHI of 2,500 while the aluminum industry’s HHI is 6,850. Is this information sufficient to conclude that the aluminum market is more concentrated than the market for refrigerators?Explain your answer.
What will happen to a collusive agreement when more firms join the existing collusion?
Suppose there are four firms in a market and each of them sells differentiated products. Does it make sense for these firms to engage in a price war? Why or why not?
How do oligopolistic firms that sell differentiated products determine their prices?
Under what circumstances does an oligopoly behave like a perfect competition and when does it behave like a monopoly?
Consider a noncollusive duopoly model with both firms supplying bottled drinking water. The firms choose prices simultaneously. The marginal cost for each firm is $1.50.The market demand is shown by the figure given below.a. Find the residual demand curves for each of the firms.b. What pricing
What happens in a monopolistically competitive market when all firms are incurring losses?
Monopolistically competitive firms earn zero economic profit in the long run as do perfectly competitive firms.Does this mean that total surplus is maximized in a monopolistically competitive market?
Will a monopolistically competitive firm earning economic profit in the short run continue to earn profit in the long run? Explain your answer.
Both monopolies and monopolistically competitive firms set marginal revenue equal to marginal cost to maximize profit. Given the same cost curves, would you expect prices to be higher in a monopoly or a monopolistically competitive market?
How is a monopolistically competitive market similar to a perfectly competitive market? Do monopolistically competitive markets and monopolies share any common features?
How are the products sold by a monopolistically competitive firm different from the products sold in a perfectly competitive market?
The price for both firms is 9 − Q, where Q is the sum of both quantities.Costs are zero; the profit is simply price times quantity.For example, if firm 1 chooses High and firm 2 chooses Low, then price is 9 − (3 + 2) = 4; payoff for firm 1 is 12 while payoff for firm 2 is 8.a. Draw the complete
Two competing firms must choose their quantity of production simultaneously. Each firm can choose either a High quantity of 3 or a Low quantity of
Consider a game with two players, China and Japan.They play the extensive-form game summarized in the following game tree. The red line indicates investing in Southeast Asia; the green line indicates investing in South Asia; and the blue line indicates investing in Europe.a. Suppose China is
While at the airport, you hear over the loudspeaker an offer to be bumped off your current flight in exchange for $100 travel credit. After it becomes clear nobody will take this offer, the offer is increased to $200. A few minutes later, the airline offers $300; then $400, and so on.Individually,
Jones TV and Smith TV are the only two stores in your town that sell flat-panel TV sets. First, Jones will choose whether to charge high prices or low prices. Smith will see Jones’s decision and then choose high or low prices.If they both choose High, each earns $10,000. If they both choose Low,
They play the extensive-form game summarized in the following game tree:a. Suppose Player 1 is choosing between Green and Red for his second move. Which will he choose if:i. Green, Green has been played.ii. Red, Red has been played.b. Suppose Player 2 is choosing between Green and Red, knowing the
Consider a game with two players, 1 and
Two gas stations, A and B, are locked in a price war. Each player has the option of raising its price (R) or continuing to charge the low price (C). They will choose strategies simultaneously. If both choose C, they will both suffer a loss of $100. If one chooses R and the other chooses C,(i) the
Use a matrix to model a two-player game of rock-paperscissors with a payoff of 1 if you win, –1 if you lose, and 0 if you tie.a. Draw the payoff matrix for this game.b. Is there an equilibrium in this game where players use pure strategies?c. Why should you use a mixed strategy to play this game?
We might suppose a soccer player has three options when taking a penalty kick: Kick right (KR), kick left (KL), or kick down the center (KC). The goalie can choose to dive right (DR), dive left (DL), or stand in the center (SC).Assume the goalie blocks the kick whenever he guesses correctly (+1),
A Beautiful Mind, a movie about John Nash, fails to properly demonstrate a Nash equilibrium. It attempts to do so in a bar scene where men at a bar (Nash and his friends) plan to ask women to dance. There is one beautiful woman that the men consider the most attractive, as well as several other
It is possible for two-player games to be quite asymmetric: Each player might have a different set of options, and the payoffs may be quite different. Consider the following example between a large firm and a small firm (the first number in each box denotes the large firm’s payoff, the second
Samsung and Sony have to decide whether they will increase the spending on research and development (R&D)in order to improve the features of their products that are sold worldwide. If they both increase the spending, the gains of doing so are zero for both. If only one of them increases the R&D
Suppose Russia is deciding to Invade or Not Invade its neighbor Ukraine. The United States has to decide to Be Tough or Make Concessions. They will make their decisions simultaneously. Their payoffs are as follows:a. What is the United States’ best response when Russia chooses Not Invade?b. What
Suppose the cable TV companies Astounding Cable and Broadcast Cable are in your city. They both must decide on a high advertising budget, a moderate advertising budget, or a low advertising budget. They will make their decisions simultaneously. Their payoffs are as follows:a. Does Astounding have a
Economic agents (for example, consumers or firms)often do things that at first glance seem to be inconsistent with their self-interest. People tip at restaurants when they are on vacation, even if they have no intention of returning to the same place. Some firms install costly pollution abatement
The trust game shown in Exhibit 13.15 is a sequential prisoners’ dilemma; as the payoff matrix shows, the outcome of the game is not socially efficient. What factors could cause this equilibrium to be different in real life?
What is meant by the first-mover advantage? How does commitment matter in a game with a first-mover advantage?a. Some games have a first-mover advantage and other games do not. Suppose you were playing rock-paper scissors as an extensive-form game. First you choose rock, paper, or scissors, and
When can backward induction be used to arrive at the equilibrium for a game?
Although there are many examples of game theory in the real world, how well do you think specifics like payoff matrices, Nash equilibria, and dominant strategies translate to reality?
Suppose that a player has a dominant strategy. Would she choose to play a mixed strategy (such as playing two strategies, each with probability 50-50)? Why or why not?
What is the difference between a pure strategy and a mixed strategy?
What is a zero-sum game? Can you think of any zero-sum games in real life?
How can the tragedy of the commons be modeled as a prisoners’ dilemma game?
What is game theory? In what situation is the theory generally applicable?
What is commitment? What’s the difference between credible and incredible commitment? Give a real-life example.
Is a player’s best response in a game the same as his dominant strategy? Explain.
What is a sequential game? How is it different from a simultaneous-move game? Explain.
A monopolist with constant marginal cost of $4 faces demand QD = 20 - 2P. This implies that the inverse demand curve is P = 10 - 11/22Q and that the marginal revenue is MR = 10 - Q.a. Sketch demand, marginal revenue, and marginal cost.b. What quantity and price will the monopolist set?c. What is
Imagine that you arrive at an economics experiment with six other people and are told that you will simulate a market. You will be the only seller. The other five people will be assigned a dollar value that they will receive if they buy the good for any amount of money (so if a person’s value is
Consider a small city that is infested by cockroaches. You have just opened the only pest control company in the city. There are two distinct residential areas in the city, high-end area and low-end area, but the cost to exterminate cockroaches is the same in both areas. Consider two consumers with
Yours is the only stall selling orange juice in a school cafeteria. Your cost of producing one cup of orange juice is $0.50. Currently, you are charging $1 for one cup of orange juice from every student. You discover that students after PE class buy more orange juice from you. On the other hand,
Suppose that during the weekends, consumers choose to do their shopping in large grocery chains, but during the week, they choose their local corner store to satisfy their immediate needs.a. How can sellers maximize their profits using the consumers’ preferences?b. Many retailers observe
The following graph shows the demand, marginal revenue, and marginal cost curves in a monopoly market.a. Identify the profit-maximizing price and quantity for this monopolist.b. What are the values of the consumer surplus, producer surplus, and deadweight loss in the market?c. How would consumer
Suppose Cattcom is a monopolist providing communication services. The marker demand curve is P = 100 - Q, its total costs are TC = Q 2+ 100, and its marginal cost is given by: MC = 10 + Q.a. What is the profit maximizing price and quantity?b. Suppose that the government imposes a tax, so the new
A monopolist producing with a constant average cost and marginal cost of $6 has the following demand for its product.Price Quantity$10 1$9 2$8 3$7 4$6 5a. Calculate total and marginal revenue for each output level.b. Find the optimal output and price.c. Determine the profit or loss as this output.
A profit-maximizing translational firm produces upholstery items. It has factories in other countries that specialize in producing seats, padding, springs, and fabric cover.Each factory receives 10 percent of the profit because the parent company wants to encourage innovation and higher quality
Textbook publishers hope to maximize profits. Authors, however, face very different incentives. Authors are typically paid royalties, which are a specified percentage of total revenue from the sale of a book. And so, for example, if an author’s contract says that she will receive 20 percent of
Critically analyze the following scenarios and explain whether you agree or disagree.a. Janet knows a lot of people who do not like Marmite, a yeast extract that is used as a spread on toast. She says that Marmite is so unpopular that Unilever, the company that manufactures Marmite, cannot possibly
This chapter explains that a monopoly is an industry structure in which only one firm provides a good or a service that has no close substitutes. Examine the following statements and explain whether you agree or not:a. In case of natural monopolies, the companies should be state-owned because their
Are there any cases where a monopoly is beneficial to the economy? Explain.
Why can a government choose to set a price ceiling for natural monopolies?
Explain why firms practice the following price discrimination and classify the types of price discrimination.a. A hotel charges walk-in customers a higher price than customers who book rooms in advance.b. A supermarket is promoting a particular brand of canned food with a “buy two, get one
Why does a monopoly firm not have a supply curve?
Both competitive firms and monopolies produce at the level where marginal cost equals marginal revenue. Other things remaining the same, why then is the price lower in a competitive market than in a monopoly?
What is the relationship between price, marginal revenue, and total revenue for a monopolist?
What is the difference between a perfectly competitive firm’s demand curve and a monopolist’s demand curve?

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