ECON2209 Lecture 7: 6February_EconStats_Karagodsky
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3. Breakdown of a cartel agreement
Consider a town in which only two residents, Gilberto and Juanita, own wells that produce water safe for drinking. Gilberto and Juanita can pump and sell as much water as they want at no cost. For them, total revenue equals profit. The following table shows the town's demand schedule for water.
Price |
Quantity Demanded |
Total Revenue |
---|---|---|
(Dollars per gallon) |
(Gallons of water) |
(Dollars) |
5.40 |
0 |
0 |
4.95 |
25 |
$123.75 |
4.50 |
50 |
$225.00 |
4.05 |
75 |
$303.75 |
3.60 |
100 |
$360.00 |
3.15 |
125 |
$393.75 |
2.70 |
150 |
$405.00 |
2.25 |
175 |
$393.75 |
1.80 |
200 |
$360.00 |
1.35 |
225 |
$303.75 |
0.90 |
250 |
$225.00 |
0.45 |
275 |
$123.75 |
0 |
300 |
0 |
Suppose Gilberto and Juanita form a cartel and behave as a monopolist. The profit-maximizing price is (1) $______ per gallon, and the total output is (2) ___ gallons.
As part of their cartel agreement, Gilberto and Juanita agree to split production equally. Therefore, Gilberto's profit is (3) $____, and Juanita's profit is (4) $_____.
Suppose that Gilberto and Juanita have been successfully operating as a cartel. They each charge the monopoly price and sell half of the monopoly quantity. Then one night before going to sleep, Gilberto says to himself, "Juanita and I aren't the best of friends anyway. If I increase my production to 25 gallons more than the cartel amount, I can increase my profit even though her profit goes down. I will do that starting tomorrow."
After Gilberto implements his new plan, the price of water (5) (increases/decreases) to (6) $____per gallon. Given Gilberto and Juanita's production levels, Gilberto's profit becomes (7) $____ and Juanita's profit becomes (8) $______.
Because Gilberto has deviated from the cartel agreement and increased his output of water to 25 gallons more than the cartel amount, Juanita decides that she will also increase her production to 25 gallons more than the cartel amount.
After Juanita increases her production, Gilberto's profit becomes (9) $_____, Juanita's profit becomes (10) $_____ and total profit (the sum of the profits of Gilberto and Juanita) is now (11) $_____
(12) True or False: Based on the fact that both Gilberto and Juanita increased production from the initial cartel quantity, you know that the output effect was smaller than the price effect at that quantity.
Gilberto and Juanita have each cheated on their cartel agreement and increased production by 25 gallons more than the cartel amount. However, they both realize that if they continue to increase output beyond this amount, they'll each suffer a decrease in profit. (To see this for yourself, consider Gilberto's profit when he produces 50 gallons more than the cartel amount compared to his profit when he produces 25 gallons more than the cartel amount.)
Neither Gilberto nor Juanita has an incentive to further increase output, nor does either have an incentive to decrease output. This outcome is an example of
(13) (resale price maintenance/ predatory pricing/ tying/ a Nash equilibrium).
TABLE 66 Stock Prices and Consumer Prices | |||
CITY | |||
Y = Rate of Change, Stock Prices, Percent Per Year | |||
X = Rate of Change, Consumer Prices, Percent Per Year | |||
CITY | Y | X | |
A | 5 | 4.3 | |
B | 11.1 | 4.6 | |
C | 3.2 | 2.4 | |
D | 7.9 | 2.4 | |
E | 25.5 | 26.4 | |
F | 3.8 | 4.2 | |
G | 11.1 | 5.5 | |
H | 9.9 | 4.7 | |
I | 3.3 | 2.2 | |
J | 1.5 | 4 | |
K | 6.4 | 4 | |
L | 8.9 | 8.4 | |
M | 8.1 | 3.3 | |
N | 13.5 | 4.7 | |
O | 4.7 | 5.2 | |
P | 7.5 | 3.6 | |
Q | 4.73. | 6 | |
R | 8 | 4 | |
S | 7.5 | 3.9 | |
T | 9 | 2.1 |
Table 66 gives data on percent change per year stock prices (Y) and consumer prices (X) for a cross section of 20 cities.
******************* answer in "SAS format" please********************* (if possible)
1) Plot the data in scattergram
2) Regress Y on X and examine the residuals from this regression. What do you observe?
3) Since the data for city(E) is unusual, repeat the regression in (2) dropping the data on city(E). Now examine the residuals from this regression. What do you observe?
4) If on the basis of the results in (2) you conclude that there was heteroscedasticity in the error variance but on the basis of the results in (3) you reverse your conclusion, what general conclusions do you draw?
State whether the following statements are true or false. Breifly justify your answer:
5) When autocorrelation is present, OLS estimators are biased as well as inefficient;
6) The R squared values of two models, one involving regression in the first-difference form and another in the level form, are not directly comparable.
7) In the presence of heterscedasticity the usual OLS method always overestimates the standard errors of estimators.
8) If a regression model is mis-specified (e.g., an important variable is ommitted), the OLS residuals will show a distinct pattern.
1. Suppose that there is a tax of $1 per unit, and the elasticity of supply is 3 and the elasticity of demand is 2 (in absolute value). How much of the $1 tax is paid by sellers?
$0.60 | ||
$0.40 | ||
$0.75 | ||
$0.67 |
2. In Market X, the external benefit of consumption is $5. In Market Y, the external cost of consumption is $10. Efficiency in both markets could be achieved by:
a tax of $5 in Market X and a subsidy of $10 in Market Y. | ||
subsidizing both markets. | ||
taxing Market Y and subsidizing Market X. | ||
taxing both markets. |
3.Economic theory suggests that a natural monopoly should be:
eliminated whenever it arises. | ||
regulated to take advantage of economies of scale. | ||
left alone to operate with excess capacity. | ||
taken over by the government. |
4.When the size of the production is the most efficient:
total cost is at the minimum. | ||
average cost is at the minimum. | ||
marginal cost is at the minimum. | ||
fixed cost is at the minimum. |
5.A firm should exit the industry if which of the following conditions apply?
TR > TC | ||
P < AC | ||
Lifetime expected profit is positive. | ||
Prices are low now but expected to rise. |
6.Figure: Costs
Reference: Ref 11-6
(Figure: Costs) Use the figure. At a price of $20, the firm earns profit of:
$75. | ||
$300. | ||
$225. | ||
$0, because P = MC at P = $20. |
7.When external benefits are present, the market price is ________, however when external costs are present, the market price is ________.
too low; too high | ||
equal to the efficient price; too low | ||
too high; too low | ||
equal to the efficient price; too high |
8.Which of the following statements is TRUE?
I. The EPA's tradeable allowances program for sulfur dioxide establishes property rights to pollute and helps reduce transaction costs by distributing allowances, maintaining databases, and monitoring emissions.
II. One criticism of tradeable allowances is that they prohibit non-businesses and environmental groups from purchasing the allowances.
III. The tradeable allowances for sulfur dioxide have performed poorly because electricity output has increased, causing a rise in sulfur dioxide levels.
I only | ||
II and III only | ||
I, II, and III | ||
III only |
9.Price floors make it illegal to compete for more customers by lowering prices, so firms compete by offering customers:
various options. | ||
more quantity. | ||
more discount. | ||
higher quality. |
10.Figure: Government Price Controls
Reference: Ref 8-3
(Figure: Government Price Controls) Refer to the figure. If the government sets the price ceiling at $31, there will be:
a shortage of 15 units. | ||
a surplus of 15 units. | ||
a supply of 20 units. | ||
no effect on the market. |
11.In which of these instances does price function as a signal in the market?
Suppliers invest more in exploration when the price of oil increases. | ||
Consumers complain of price gouging as the price of oil skyrockets. | ||
Government imposes price controls on the skyrocketing price of oil. | ||
All of the answers are correct. |
12.Ethanol and sugar are both made from sugar cane, and ethanol can be used as substitute fuel for oil. Increasing oil prices cause the demand for ethanol to increase. This will cause the ______ sugar to ______ and its price to ______.
demand for; decrease; decrease | ||
supply of; increase; increase | ||
supply of; decrease; increase | ||
demand for; increase; increase |
13.Why do cotton growers spend billions of dollars to dam rivers and transport water hundreds of miles to grow cotton in California deserts?
Cotton growers in California don't pay payroll taxes. | ||
The water used to grow California cotton is highly subsidized by the government. | ||
Cotton growers in California are mostly operated as nonprofit enterprises. | ||
The water used to grow California cotton is high in mineral contents, making for a bigger cotton yield. |
14.Suppose that the equilibrium price in the market is $10. If the current market price is $7.50:
the equilibrium price will fall to $7.50. | ||
competition among buyers will increase the current price. | ||
the current price will fall below $7.50 as sellers compete for market share. | ||
There is not enough information provided to answer the question. |
15.Which of the following would increase the demand for beef?
lower pork prices | ||
higher consumer income | ||
higher prices of feed grains used to feed beef cattle | ||
an increase in the price of beef |
16.A change in quantity supplied is reflected by a movement along the same supply curve while a change in supply refers to a shift in the entire supply curve.
True
False
17.Table: Production in the United States and Germany
Labor units required to produce: |
One Clock | One Sofa |
United States | 2 | 5 | |
Germany | 3 | 9 |
Reference: Ref 2-8
(Table: Production in the United States and Germany) According to the table, the opportunity cost of producing one sofa in the United States is _________, and the opportunity cost of producing one sofa in Germany is _______.
two clocks; three clocks | ||
10 clocks; 27 clocks | ||
0.4 clocks; 0.33 clocks | ||
2.5 clocks; three clocks |
18.Mark values his drum set at $800 and Ella values her guitar at $1,000. Suppose that Mark trades his drum set for Ella's guitar.
This trade makes Ella worse off by $200. | ||
This trade makes Mark better off by $200. | ||
Mark must value Ella's guitar for at least $1,000, and Ella must value Mark's drum set for at least $800. | ||
This trade creates value by moving the guitar and drum set to people who value them more. |