SECTION A: MULTIPLE CHOICE

Answer ALL questions. Each question is worth 1 mark.

Record your answers on the attached Multiple Choice Answer Sheet on Page 11 of the
exam paper.
[Suggested time for Section A: 40 minutes]

1.

To deter a potential entrant, an existing firm in a market may threaten to sharply

increase production so that the entrant will be left with a small share of the market.
The firm can make this threat credible by limiting its own options, and possible
actions of this type include:
A. signing long-term sales contracts that commit the firm to high levels of output.
B. building a very large factory that could potentially produce enough output to meet
most of the market demand.
C. signing long-term purchase contracts for large amounts of production inputs.
D. all of the above.

2.

Bettes Breakfast, a perfectly competitive eatery, sells its Breakfast Special (the
only item on the menu) for $5.00. The costs of waiters, cooks, power, food etc.
average out to $3.95 per meal; the costs of the lease, insurance and other such
expenses average out to $1.25 per meal. Bette should
A.
B.
C.
D.

3.

close her doors immediately.

continue producing in the short and long run.
continue producing in the short run, but plan to go out of business in the long run.
raise her prices above the perfectly competitive level.

The revenue and cost curves in Figure 1 below are those of a natural monopoly.
Suppose that the government decides to limit monopoly power with price
regulation. If the government sets the price at the competitive level, it will set the
price at __________.

A.
B.
C.
D.

P1
P3
P4
P2

Figure 1

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4.

Refer to Figure 2 below. In moving from the competitive level of output and price
to the monopoly level of output and price, the deadweight loss is the area:

A.
B.
C.
D.

5.

Figure 2

QmEHQc
GEH
FEH
GFH

Suppose the monopolist in Figure 2 above is able to practice first-degree (perfect)

price discrimination. Compared to the competitive outcome:
A.
B.
C.
D.

quantity traded falls from Qc to Qm, and consumer surplus falls by area DCE.
quantity traded falls from Qc to Qm, and consumer surplus falls by area DBH.
consumer surplus falls by area DCE.
consumer surplus falls by area DBH.

Scenario 1
Number of days of workers
0
1
2
3
4

6.

A firm can hire workers at a wage of $7 per hour. Assume that each worker works
7.5 hours a day. The firms production function is shown in Scenario 1, above. If
each unit of output sells for $4.30, how many days of labour will the firm hire to
maximise profit?
A.
B.
C.
D.

7.

Number of units of output

0
16
30
42
52

1
2
3
4

When compared to the demand curve for a factor input when several inputs are
variable, the demand curve for a factor input when only one input is variable is
A.
B.
C.
D.

less elastic.
more elastic.
vertical.
horizontal.

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8.

Assume that as the wage rate increases, a workers income effect for leisure is
larger than the substitution effect. We can conclude that in this region, the workers
A.
B.
C.
D.

9.

labour supply curve will be backward bending.

labour supply curve will have the usual upward slope.
labour supply curve will be completely inelastic.
labour supply curve will be horizontal.

A firm purchases a factor of production in a competitive market. At the current

purchase rate the MRP of the factor is greater than the marginal expenditure for
the factor. Thus, the firm
A. should not use this factor of production because it has no potential in generating a
profit.
B. is now maximizing profit.
C. can increase profit by reducing the employment of the factor of production.
D. can increase profit by expanding the employment of the factor of production.

10. In the sequential version of a game using the same players, the same strategies,
and the same possible outcomes as the original game, the equilibrium
A.
B.
C.
D.

may be different than in the original game.

must be different than in the original game.
will be the same as in the original game.
is the same as the cooperative version of the original game.

Scenario 2

Lawrence LLP

ERS Corporation
Dump Cash Assets
Put Poison Pill
of Zamboni Tech
In Turbo Tech
Buy Turbo Tech
$50, -$0.6
-$80, -$1
Buy Zamboni Tech
-$0.5, -$0.6
$1, -$1

11. Consider the game shown in Scenario 2, above: Payoffs are in millions of dollars.
Lawrence LLPs payoff is listed before the comma; ERSs payoff is listed after the
comma. In the game in Scenario 2,
A.
B.
C.
D.

Poison Pill is a dominant strategy for ERS Corporation.

Dump is a dominant strategy for ERS Corporation.
TurboTech is a dominant strategy for Lawrence LLP.
ZamboniTech is a dominant strategy for Lawrence LLP.

12. In the game in Scenario 2, what is the Nash equilibrium?

A.
B.
C.
D.

The strategy pair associated with -$100, -$1.

The strategy pair associated with $50, -$0.6.
The strategy pair associated with $1, -$1.
The strategy pair associated with -$0.5, -$0.5.

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Scenario 3
IVY Corp

SAC Group
Business Plan Y
Business Plan Z
$30, $0
$30, $60
$80, $30
$40, $10

Business Plan A
Business Plan B

13. In the Scenario 3 game, above, where the payoff to IVY Corp is before the comma
and SAC Groups payoff is after the comma,
A.
B.
C.
D.

Business Plan Y is a dominant strategy for SAC Group.

Business Plan Z is a dominant strategy for SAC Group.
Business Plan A is a dominant strategy for IVY Corp.
Business Plan B is a dominant strategy for IVY Corp.

Scenario 4

Gooi Cones

Ici Cones
Buy Gelato machines
Buy Yoghurt machines

Buy Gelato
machines
$30, $0
$80, $30

Buy Yoghurt
machines
$30, $60
$10, $10

14. Refer to Scenario 4, above. Gooi Cones payoff is listed before the comma; Ici
Cones payoff after the comma. If Ici Cones moves first, what outcome will occur?
A. Ici Cones will buy Gelato machines, and Gooi Cones will respond by buying Yoghurt
machines.
B. Ici Cones will buy Yoghurt machines, and Gooi Cones will respond by buying Gelato
machines.
C. Ici Cones will buy Yoghurt machines, and Gooi Cones will also buy Yoghurt machines
to retaliate.
D. Ici Cones will buy Gelato machines, and Gooi Cones will also buy Gelato machines to
retaliate.
Scenario 5
Player R

Player C

Strategy C1
Strategy C2

Strategy
R1
500, 500
1000, 100

15. Playing the game in Scenario 5 (shown above) sequentially would

A.
B.
C.
D.

not change the equilibrium.

change the equilibrium to (C1,R1).
change the equilibrium to (C2,R1) if C moved first.
change the equilibrium to (C2,R1) if R moved first.

16. Playing the Scenario 5 game by using a maximin strategy would

A.
B.
C.
D.

not change the equilibrium from the equilibrium of the original game.
change the equilibrium to (R1,C2).
change the equilibrium to (R2,C1) if R moved first.
change the equilibrium to (R2,C1) if C moved first.

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Strategy
R2
100, 1000
200, 200

17. Assume that a particular state has decided to outlaw the sharing of individuals
credit histories as an illegal invasion of privacy. As a result of this action we would
expect the
A.
B.
C.
D.

cost of borrowing money to rise.

number of loans to unworthy credit risks to rise.
problems of asymmetric information to become more severe.
all of the above.

18. When a moral hazard problem exists for an activity, the marginal cost of the
activity
A.
B.
C.
D.

is lowered, and the amount of the activity increases above the efficient level.
is lowered, and the amount of the activity falls below the efficient level.
is raised, and the amount of the activity increases above the efficient level.
is raised, and the amount of the activity falls below the efficient level.

19. The Australian government is currently considering a proposal to make disability

insurance mandatory for all households. This proposal is likely to:
A.
B.
C.
D.

increase the amount of information available to insurers about the population.

raise the cost of disability insurance for everyone.
lower rates for all households because it will include low-risk households in the pool.
raise the cost of disability insurance for high-risk individuals.

20. Which of the statements listed below, IS NOT a reason why university qualifications
can signal labour market productivity?
A. Individuals with relatively low ability may have to pay for tutoring services or other
extra help to accomplish the same educational goal.
B. Individuals with relatively low ability are likely to spend less time at university.
C. Individuals with relatively low ability may have to repeat courses, which would
increase their costs of achieving a degree.
D. All of the above.

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SECTION B
Answer any Two (2) questions in answer booklet.
Each question is worth 15 marks.
Use diagrams where appropriate.
[Suggested time for Section B: 40 minutes per question]
21. MARKET STRUCTURES

a. For a particular competitive industry of your choice, describe and illustrate with
relevant diagrams the course of events following an increase in demand. What
happens to output, market price, and economic profit in the short run and in the
long run (in your example)?
[6 marks]
Specifying the main ASSUMPTIONS and rationale of Perfect Competition: [1 mark]
Specifically link their competitive industry example (e.g. wheat, soybean etc.) into their
explanation: [1 mark]
Full Explanation of Industry (diagram) and Firm (diagram) [4 marks]:

b. Explain and illustrate with a relevant diagram how a corporate business can
profit from price discrimination. (Be specific and use a real-world sector in your
answer)
[7 marks]
1 mark Theory/Definition:
3 marks relevant diagram showing how their example can and does price discriminate.
3 marks for quality of their explanation

c.

Referring to your real-world sector in part (b) above, what do you think would
happen to an individual firms ability to price discriminate if more competitors
entered the market?
[2 marks]

2 marks for quality of explanation

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22. FACTOR MARKETS

The following graph refers to the hire of labour by a monopsonist, where ME = marginal
expenditure, AE = average expenditure and MRPL = marginal product of labour.

ME

AE

MRPL

a. From the graph determine the units of labour hired and the wage rate under
competitive conditions. Explain your answer.
[3 marks]
[3 marks Tips: Under competitive conditions, use AE = MRPL]

b. From the graph determine the units of labour a profit-maximising monopsonist

would hire and the wage rate the monopsonist would offer. Explain your
answer.
[3 marks]
[3 marks Tips: The profit-maximising monopsonist would equate ME to MRPL.]

c.

Examine the main variables affecting firms demand for labour, supporting your
answer with a current real-world example.
[3 marks]

[2 marks for identifying the variables and providing an explanation: MRPL=MR*MPL]

[Award up to 1 full mark for their current real-world example]

d. Suppose a workers hourly wage rate decreases from $8 to $7. Suppose the
worker does have a backward-bending labour supply curve. Explain the income
and substitution effects of this wage reduction and support your answer with a
separate diagram.
[6 marks]
[1 mark for correct budget lines]
[3 marks for demonstration of income effect and substitution effect]
[1 mark for diagram of backward bending labour supply curve]
[1 mark for a realistic explanation]
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23. GAME THEORY

Consider two transnational corporations that sell consumer electronics: Mapple and Giggle.
Mapple, known for its high quality and trendy products, produces a smartphonethe iFone
Nextthat has become very popular with teenagers and young adults. However, its
competitor, Giggle, is considering a few major innovations to their Lexus smartphone series
(a competing product of the iFone Next). Thus, Mapple must decide whether to continue to
set a high price on the iFone or a low price that deters Giggle from undertaking such major
innovations.
If Mapple sets a high price while Giggle does major innovations, Mapple will make an
annual profit of $6m and Giggle will make one-third of that amount in a year. If Mapple
sets a low price while Giggle does major innovations, Mapple will make an annual profit of
$3m and Giggle will make an annual loss of $2m. If Mapple sets a high price and Giggle
does minor innovations, Mapple will make an annual profit of $10m and Giggle will earn
one-tenth of that amount in a year. If Mapple sets a low price and Giggle does minor
innovations, Mapple will make an annual profit of $6m and Giggle will make one-sixth of
that amount in a year.

Answer the following questions by making use of the above information:

a. Create a payoff matrix to describe this scenario
[2 marks]
[2 marks = 4*0.5 marks ... possibly allocate half marks for each correct payoff quadrant.]

b. Does either firm have a dominant strategy? (explain your answer by using the
information in your payoff matrix and providing a definition of dominant
strategy)
[4 marks]
1 mark: define dominant strategy
0.5 mark for Mapples dominant strategy is the high price and 1 mark for explanation
0.5 mark for Giggles dominant strategy is the high price and 1 mark for explanation

c.

Mapples CEO has vaguely suggested a willingness to lower price in order to

deter Giggle from doing major innovations. Is this threat credible in light of the
payoff matrix above?
[1 mark]

1 mark

d. What actions could Mapple take to make its threat credible? (discuss in your
answer whether you think Mapple needs to make its threat credible in the first
place)
[4 marks]
[Students need to think outside the box here to receive full marks.]
[2 marks for each possibility identified and 2 marks for the level of explanation detail]

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e. Does this game have a Nash Equilibrium/Equilibria? (explain your answer by

using the information in your payoff matrix and providing a definition of Nash
equilibrium)
[2 marks]
0.5 mark for definition of Nash
0.5 mark for identifying 1 equilibrium
1 mark for detailing the payoff matrix details.]

f.

In relation to the outcome in part (e), how are consumers likely to be affected by
the competition between Mapple and Giggle? Are consumers better or worse
off?
[2 marks]

2 marks for explanation

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24. MARKETS WITH ASYMMETRIC INFORMATION

Ludovica is a diligent student, in her final year of full-time study at university and working
part-time in a small financial firm. In the coming year, Ludovica will need to make some
important decisions. She will need to find a graduate job and purchase a car for herself.
In the past Ludovica has mainly used public transport, but now she would like to own a small
car for more travel flexibility. Ludovica knows very little about the makes and models of
different cars, and is a bit concerned about potentially buying a lemon. She is seeking in
advance some advice from you to help her make a well-informed decision about buying a
quality small car, from either a new-car or used-car dealer, or an individual seller.

a. Using market signals, reputation, standardization and research, how can

Ludovica gain more knowledge about the quality of the used and new cars on
sale?
[7 marks]
2 marks for definition of the problem
5 marks for detailed explanation

b. Ludovica has an interview for a competitive graduate program at a wellrecognised financial institution (a higher paying and more rewarding experience
than her current job). How might Ludovica signal to the interview team her
ability and productivity advantages over other applicants?
[4 marks]
2 marks for identifying it
2 marks for discussing her productivity advantages

c.

As with any employer, the financial institution (the principal) takes on a potential
risk when the company hires Ludovica (the agent) in the graduate program.
What strategies do you think the employer might put in place to reduce the
principal-agent problem?
[4 marks]

1 mark for S-A definition

3 marks for explanation of strategies

END OF EXAMINATION PAPER

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