Managerial Economics End Term: 13 April 2025 (January 2025 term)

There are 50 low-risk people in a town and 50 high-risk people. A low-risk person has an average of $500 in medical expenses each year and is willing to pay $800 for medical insurance (this person is risk averse). A high-risk person has an average of $1,200 in medical expenses each year and is willing to pay $1,500 for medical insurance. Insurance companies are unable to differentiate who is high-risk and who is low risk.
Based on the above data, answer the given subquestions.

If the insurance provider offered medical insurance at a price of $1,000

There are 50 low-risk people in a town and 50 high-risk people. A low-risk person has an average of $500 in medical expenses each year and is willing to pay $800 for medical insurance (this person is risk averse). A high-risk person has an average of $1,200 in medical expenses each year and is willing to pay $1,500 for medical insurance. Insurance companies are unable to differentiate who is high-risk and who is low risk.
Based on the above data, answer the given subquestions.

If the insurance company offered medical insurance at a price of $1,300

A beekeeper lives adjacent to an apple orchard. The orchard owner benefits from the bees because each hive pollinates about one acre of apple trees. The orchard owner pays nothing for this service, however, because the bees come to the orchard without him having to do anything. Because there are not enough bees to pollinate the entire orchard, the orchard owner must complete the pollination by artificial means, at a cost of $10 per acre of trees.
Beekeeping has a marginal cost MC = 10 + 5Q, where Q is the number of beehives. Each hive yields $40 worth of honey.
Based on the above data, answer the given subquestions.

What should be the socially efficient number of hives that the beekeeper should maintain _________

A beekeeper lives adjacent to an apple orchard. The orchard owner benefits from the bees because each hive pollinates about one acre of apple trees. The orchard owner pays nothing for this service, however, because the bees come to the orchard without him having to do anything. Because there are not enough bees to pollinate the entire orchard, the orchard owner must complete the pollination by artificial means, at a cost of $10 per acre of trees.
Beekeeping has a marginal cost MC = 10 + 5Q, where Q is the number of beehives. Each hive yields $40 worth of honey.
Based on the above data, answer the given subquestions.

How many beehives will the beekeeper maintain if we ignore the apple orchard _________

A monopolist faces the demand curve P = 11 - Q, where P is measured in dollars per unit and Q in thousands of units. The monopolist has a constant average cost of $6 per unit. Answer the given subquestions

What are the monopolist’s profit-maximizing price and quantity?

A monopolist faces the demand curve P = 11 - Q, where P is measured in dollars per unit and Q in thousands of units. The monopolist has a constant average cost of $6 per unit. Answer the given subquestions

The resulting profit will be

A monopolist faces the demand curve P = 11 - Q, where P is measured in dollars per unit and Q in thousands of units. The monopolist has a constant average cost of $6 per unit. Answer the given subquestions

Calculate the firm’s degree of monopoly power using the Lerner index

Suppose two firms operate in a market and can produce at a constant average (and marginal) cost of AC = MC = $5. Let Q1 be the output of the first firm and Q2 be the output of the second. Market demand is given by Q1 + Q2 = 53 – P. Assuming that the firms are competing as per the Cournot competition and answer the given subquestions.

Suppose two firms operate in a market and can produce at a constant average (and marginal) cost of AC = MC = $5. Let Q1 be the output of the first firm and Q2 be the output of the second. Market demand is given by Q1 + Q2 = 53 – P. Assuming that the firms are competing as per the Cournot competition.
Find out the equilibrium quantity for firm 1 Q1*= ______________

Suppose two firms operate in a market and can produce at a constant average (and marginal) cost of AC = MC = $5. Let Q1 be the output of the first firm and Q2 be the output of the second. Market demand is given by Q1 + Q2 = 53 – P. Assuming that the firms are competing as per the Cournot competition and answer the given subquestions.

Suppose two firms operate in a market and can produce at a constant average (and marginal) cost of AC = MC = $5. Let Q1 be the output of the first firm and Q2 be the output of the second. Market demand is given by Q1 + Q2 = 53 – P. Assuming that the firms are competing as per the Cournot competition.
Find out the equilibrium quantity for firm 2 Q2*= ______________

Suppose two firms operate in a market and can produce at a constant average (and marginal) cost of AC = MC = $5. Let Q1 be the output of the first firm and Q2 be the output of the second. Market demand is given by Q1 + Q2 = 53 – P. Assuming that the firms are competing as per the Cournot competition and answer the given subquestions.

Suppose two firms operate in a market and can produce at a constant average (and marginal) cost of AC = MC = $5. Let Q1 be the output of the first firm and Q2 be the output of the second. Market demand is given by Q1 + Q2 = 53 – P. Assuming that the firms are competing as per the Cournot competition.
Find out the equilibrium price P*= _______________

Suppose two firms operate in a market and can produce at a constant average (and marginal) cost of AC = MC = $5. Let Q1 be the output of the first firm and Q2 be the output of the second. Market demand is given by Q1 + Q2 = 53 – P. Assuming that the firms are competing as per the Cournot competition and answer the given subquestions.

Suppose two firms operate in a market and can produce at a constant average (and marginal) cost of AC = MC = $5. Let Q1 be the output of the first firm and Q2 be the output of the second. Market demand is given by Q1 + Q2 = 53 – P. Assuming that the firms are competing as per the Cournot competition.
Find out the equilibrium profit for firm 1 π1 = ______________

Suppose two firms operate in a market and can produce at a constant average (and marginal) cost of AC = MC = $5. Let Q1 be the output of the first firm and Q2 be the output of the second. Market demand is given by Q1 + Q2 = 53 – P. Assuming that the firms are competing as per the Cournot competition and answer the given subquestions.

Suppose two firms operate in a market and can produce at a constant average (and marginal) cost of AC = MC = $5. Let Q1 be the output of the first firm and Q2 be the output of the second. Market demand is given by Q1 + Q2 = 53 – P. Assuming that the firms are competing as per the Cournot competition.
Find out the equilibrium profit for firm 2 π2 = ______________

Suppose two firms operate in a market and can produce at a constant average (and marginal) cost of AC = MC = $5. Let Q1 be the output of the first firm and Q2 be the output of the second. Market demand is given by Q1 + Q2 = 53 – P. Assuming that the firms are competing as per the Cournot competition and answer the given subquestions.

Now suppose that the two firms are competing in the Stackelberg manner where one of the firms makes its output decision before the other. Suppose Firm 1 is the Stackelberg leader (i.e., makes its output decisions before Firm 2).
Calculate the equilibrium quantity for the firm 1 Q1*= ______________

Suppose two firms operate in a market and can produce at a constant average (and marginal) cost of AC = MC = $5. Let Q1 be the output of the first firm and Q2 be the output of the second. Market demand is given by Q1 + Q2 = 53 – P. Assuming that the firms are competing as per the Cournot competition and answer the given subquestions.

Now suppose that the two firms are competing in the Stackelberg manner where one of the firms makes its output decision before the other. Suppose Firm 1 is the Stackelberg leader (i.e., makes its output decisions before Firm 2).
Calculate the equilibrium quantity for the firm 2 Q2*= ______________

Suppose two firms operate in a market and can produce at a constant average (and marginal) cost of AC = MC = $5. Let Q1 be the output of the first firm and Q2 be the output of the second. Market demand is given by Q1 + Q2 = 53 – P. Assuming that the firms are competing as per the Cournot competition and answer the given subquestions.

Now suppose that the two firms are competing in the Stackelberg manner where one of the firms makes its output decision before the other. Suppose Firm 1 is the Stackelberg leader (i.e., makes its output decisions before Firm 2).
Calculate the equilibrium for the firm market price P*= ____________

Suppose two firms operate in a market and can produce at a constant average (and marginal) cost of AC = MC = $5. Let Q1 be the output of the first firm and Q2 be the output of the second. Market demand is given by Q1 + Q2 = 53 – P. Assuming that the firms are competing as per the Cournot competition and answer the given subquestions.

Now suppose that the two firms are competing in the Stackelberg manner where one of the firms makes its output decision before the other. Suppose Firm 1 is the Stackelberg leader (i.e., makes its output decisions before Firm 2).
Calculate the equilibrium profits (π1) of the firm 1 π1 = _____________

Suppose two firms operate in a market and can produce at a constant average (and marginal) cost of AC = MC = $5. Let Q1 be the output of the first firm and Q2 be the output of the second. Market demand is given by Q1 + Q2 = 53 – P. Assuming that the firms are competing as per the Cournot competition and answer the given subquestions.

Now suppose that the two firms are competing in the Stackelberg manner where one of the firms makes its output decision before the other. Suppose Firm 1 is the Stackelberg leader (i.e., makes its output decisions before Firm 2).
Calculate the equilibrium profits (π2) of the firm 2 π2 = _____________

Two used car dealerships compete side by side on a main road. The first, Hamid’s Cars, always sells high-quality cars that it carefully inspects and, if necessary, services. On average, it costs Hamid’s $7000 to buy and service each car that it sells. The second dealership, Latif’s Motors, always sells lower-quality cars. On average, it costs Latif’s only $4000 for each car that it sells. If consumers knew the quality of the used cars they were buying, they would pay $9,000 on average for Hamid’s cars and only $6000 on average for Latif’s cars.
Without more information, consumers do not know the quality of each dealership’s cars. In this case, they would figure that they have a 50-50 chance of ending up with a high quality car, and are thus willing to pay $7500 for a car.
Hamid has an idea: He will offer a bumper-to-bumper warranty for all cars he sells. He knows that a warranty lasting Y years will cost $500Y on average, and he also knows that if Latif tries to offer the same warranty, it will cost Latif $1000Y on average.
Suppose Hamid offers a one-year warranty on all of the cars he sells.
Based on the above data, answer the given subquestions.

What is Latif’s profit (per car in $) if he does not offer a one-year warranty? _________________

Two used car dealerships compete side by side on a main road. The first, Hamid’s Cars, always sells high-quality cars that it carefully inspects and, if necessary, services. On average, it costs Hamid’s $7000 to buy and service each car that it sells. The second dealership, Latif’s Motors, always sells lower-quality cars. On average, it costs Latif’s only $4000 for each car that it sells. If consumers knew the quality of the used cars they were buying, they would pay $9,000 on average for Hamid’s cars and only $6000 on average for Latif’s cars.
Without more information, consumers do not know the quality of each dealership’s cars. In this case, they would figure that they have a 50-50 chance of ending up with a high quality car, and are thus willing to pay $7500 for a car.
Hamid has an idea: He will offer a bumper-to-bumper warranty for all cars he sells. He knows that a warranty lasting Y years will cost $500Y on average, and he also knows that if Latif tries to offer the same warranty, it will cost Latif $1000Y on average.
Suppose Hamid offers a one-year warranty on all of the cars he sells.
Based on the above data, answer the given subquestions.

What is Latif’s profit (per car in $) if he offers a one-year warranty? ________________

Two used car dealerships compete side by side on a main road. The first, Hamid’s Cars, always sells high-quality cars that it carefully inspects and, if necessary, services. On average, it costs Hamid’s $7000 to buy and service each car that it sells. The second dealership, Latif’s Motors, always sells lower-quality cars. On average, it costs Latif’s only $4000 for each car that it sells. If consumers knew the quality of the used cars they were buying, they would pay $9,000 on average for Hamid’s cars and only $6000 on average for Latif’s cars.
Without more information, consumers do not know the quality of each dealership’s cars. In this case, they would figure that they have a 50-50 chance of ending up with a high quality car, and are thus willing to pay $7500 for a car.
Hamid has an idea: He will offer a bumper-to-bumper warranty for all cars he sells. He knows that a warranty lasting Y years will cost $500Y on average, and he also knows that if Latif tries to offer the same warranty, it will cost Latif $1000Y on average.
Suppose Hamid offers a one-year warranty on all of the cars he sells.
Based on the above data, answer the given subquestions.

What is Hamid’s profit (per car in $) if Latif’s does not offer a one-year warranty? _______________

Two used car dealerships compete side by side on a main road. The first, Hamid’s Cars, always sells high-quality cars that it carefully inspects and, if necessary, services. On average, it costs Hamid’s $7000 to buy and service each car that it sells. The second dealership, Latif’s Motors, always sells lower-quality cars. On average, it costs Latif’s only $4000 for each car that it sells. If consumers knew the quality of the used cars they were buying, they would pay $9,000 on average for Hamid’s cars and only $6000 on average for Latif’s cars.
Without more information, consumers do not know the quality of each dealership’s cars. In this case, they would figure that they have a 50-50 chance of ending up with a high quality car, and are thus willing to pay $7500 for a car.
Hamid has an idea: He will offer a bumper-to-bumper warranty for all cars he sells. He knows that a warranty lasting Y years will cost $500Y on average, and he also knows that if Latif tries to offer the same warranty, it will cost Latif $1000Y on average.
Suppose Hamid offers a one-year warranty on all of the cars he sells.
Based on the above data, answer the given subquestions.

What is Hamid’s profit (per car in $) if Latif’s offers a one-year warranty? ________________

Two used car dealerships compete side by side on a main road. The first, Hamid’s Cars, always sells high-quality cars that it carefully inspects and, if necessary, services. On average, it costs Hamid’s $7000 to buy and service each car that it sells. The second dealership, Latif’s Motors, always sells lower-quality cars. On average, it costs Latif’s only $4000 for each car that it sells. If consumers knew the quality of the used cars they were buying, they would pay $9,000 on average for Hamid’s cars and only $6000 on average for Latif’s cars.
Without more information, consumers do not know the quality of each dealership’s cars. In this case, they would figure that they have a 50-50 chance of ending up with a high quality car, and are thus willing to pay $7500 for a car.
Hamid has an idea: He will offer a bumper-to-bumper warranty for all cars he sells. He knows that a warranty lasting Y years will cost $500Y on average, and he also knows that if Latif tries to offer the same warranty, it will cost Latif $1000Y on average.
Suppose Hamid offers a one-year warranty on all of the cars he sells.
Based on the above data, answer the given subquestions.

Will Latif’s match Hamid’s one-year warranty?

Two used car dealerships compete side by side on a main road. The first, Hamid’s Cars, always sells high-quality cars that it carefully inspects and, if necessary, services. On average, it costs Hamid’s $7000 to buy and service each car that it sells. The second dealership, Latif’s Motors, always sells lower-quality cars. On average, it costs Latif’s only $4000 for each car that it sells. If consumers knew the quality of the used cars they were buying, they would pay $9,000 on average for Hamid’s cars and only $6000 on average for Latif’s cars.
Without more information, consumers do not know the quality of each dealership’s cars. In this case, they would figure that they have a 50-50 chance of ending up with a high quality car, and are thus willing to pay $7500 for a car.
Hamid has an idea: He will offer a bumper-to-bumper warranty for all cars he sells. He knows that a warranty lasting Y years will cost $500Y on average, and he also knows that if Latif tries to offer the same warranty, it will cost Latif $1000Y on average.
Suppose Hamid offers a one-year warranty on all of the cars he sells.
Based on the above data, answer the given subquestions.

Is it a good idea for Hamid’s to offer a one-year warranty?

Two used car dealerships compete side by side on a main road. The first, Hamid’s Cars, always sells high-quality cars that it carefully inspects and, if necessary, services. On average, it costs Hamid’s $7000 to buy and service each car that it sells. The second dealership, Latif’s Motors, always sells lower-quality cars. On average, it costs Latif’s only $4000 for each car that it sells. If consumers knew the quality of the used cars they were buying, they would pay $9,000 on average for Hamid’s cars and only $6000 on average for Latif’s cars.
Without more information, consumers do not know the quality of each dealership’s cars. In this case, they would figure that they have a 50-50 chance of ending up with a high quality car, and are thus willing to pay $7500 for a car.
Hamid has an idea: He will offer a bumper-to-bumper warranty for all cars he sells. He knows that a warranty lasting Y years will cost $500Y on average, and he also knows that if Latif tries to offer the same warranty, it will cost Latif $1000Y on average.
Suppose Hamid offers a one-year warranty on all of the cars he sells.
Based on the above data, answer the given subquestions.

What if Hamid offers a two-year warranty? Will this generate a credible signal of quality?

The market demand curve for pizzas is P=300-Q and the market supply curve is P=60+2Q. A tax of t=15 INR is imposed on one unit of pizza sold. Answer the given subquestions.

The equilibrium quantity and price before incidence of tax are

The market demand curve for pizzas is P=300-Q and the market supply curve is P=60+2Q. A tax of t=15 INR is imposed on one unit of pizza sold. Answer the given subquestions.

Consumer surplus before incidence of tax is

The market demand curve for pizzas is P=300-Q and the market supply curve is P=60+2Q. A tax of t=15 INR is imposed on one unit of pizza sold. Answer the given subquestions.

Producer surplus before incidence of tax is

The market demand curve for pizzas is P=300-Q and the market supply curve is P=60+2Q. A tax of t=15 INR is imposed on one unit of pizza sold. Answer the given subquestions.

The equilibrium quantity after the incidence of tax is

The market demand curve for pizzas is P=300-Q and the market supply curve is P=60+2Q. A tax of t=15 INR is imposed on one unit of pizza sold. Answer the given subquestions.

The new price that buyer pays after incidence of tax is

The market demand curve for pizzas is P=300-Q and the market supply curve is P=60+2Q. A tax of t=15 INR is imposed on one unit of pizza sold. Answer the given subquestions.

The net price received by the seller after incidence of tax

The market demand curve for pizzas is P=300-Q and the market supply curve is P=60+2Q. A tax of t=15 INR is imposed on one unit of pizza sold. Answer the given subquestions.

The loss in consumer surplus due to incidence of tax is

The market demand curve for pizzas is P=300-Q and the market supply curve is P=60+2Q. A tax of t=15 INR is imposed on one unit of pizza sold. Answer the given subquestions.

The loss in producer surplus due to incidence of tax is

The market demand curve for pizzas is P=300-Q and the market supply curve is P=60+2Q. A tax of t=15 INR is imposed on one unit of pizza sold. Answer the given subquestions.

The total tax revenue is

The market demand curve for pizzas is P=300-Q and the market supply curve is P=60+2Q. A tax of t=15 INR is imposed on one unit of pizza sold. Answer the given subquestions.

Deadweight loss of tax is

What is true about monopolistic competition

Choose the correct statement

The Cobb-Douglas production function F(K, L)=K^(p)L^(q)

Choose the correct alternative

Adverse selection occurs when

Moral hazard occurs when contracts are written in such a way that