Question 1 (6 Marks) Part a) (3 mark) Suppose that when the price of salt is $1 per kg, buyers would purchase 20kg per year. But when the price falls to $0.9, the quantity demanded rises to 21kg per year. i) What is the price elasticity of demand for salt at the original price? ii) How would you interpret this demand elasticity? Part b) (3 marks) Suppose that when the price of a golf club membership is $500 per year, 1,000 buyers want to purchase the membership per year. But when the price falls to $495, the quantity demanded rises to 1,200 per year. i) Calculate the price elasticity of demand for the membership at the original price. ii) Is the demand for membership elastic or inelastic with respect to price? Explain your answer. Question 2 (4 Marks) The weekly supply for petrol (in thousands of units) is given by the equation P = 3 +2Q, and the weekly demand is given by the equation P = 9 Q, where P is the price in dollars. a) Find the equilibrium price and quantity. b) Calculate the weekly producer surplus. c) Calculate the weekly consumer surplus. d) Calculate the total weekly economic surplus generated at the market equilibrium. Question 3 (7 Marks) Part a) (3 marks) Suppose a firm has the following total cost function TC = 100 + 2q2 . i) If price equals $20, what is the firm's output decision? ii) What are its short-run profits? Part b) (4 marks) Given the demand and cost equations of this monopolistic firm: Demand: P=50-Q and Total Cost: TC=80+20Q+ 2 2 , i) What is the marginal revenue ii) Find the profit-maximizing quantity and price iii) What is the total profit of the monopolist. Question 4 (3 marks) Consider the decisions facing two cigarette companies, Benson & Hedges and Philip Morris. The following table shows how the profits of the two companies depends on their actions. Philip Morris' Decision Benson & Hedges' decision Advertise Don't advertise Advertise Benson & Hedges get $3b profit Philip Morris get $3b profit Benson & Hedges get $2b profit Philip Morris get $5b profit Don't advertise Benson & Hedges get $5b profit Philip Morris get $2b profit Benson & Hedges get $4b profit Philip Morris get $4b profit a) What is the dominant strategy for Benson & Hedges? For Philip Morris? Explain. b) Define Nash Equilibrium. What is the Nash Equilibrium for the decision? c) Define prisoner's dilemma. Is this game a prisoner's dilemma? Explain.