16. A monopoly will set the price

at the highest price along the demand it faces.

equal to the value at which marginal cost intersects the demand curve.

so that it can sell the quantity at which marginal revenue is equal to marginal cost.

so that it can sell the quantity at which marginal revenue is equal to zero.

17.

A monopolist will always end up choosing to operate

even if its profit are negative.

on the elastic portion of the demand it faces.

until such time as a new competitor enters its market.

only if it can capture the entire consumer surplus.

18.

When first-degree price discrimination is perfectly implemented social gain is maximized, with all gains going to the monopoly.

True

False

19.

Which of the following is the best example of second-degree price discrimination?

A car salesman attempts to discover and charge the highest price that the customer is willing to pay.

A sub sandwich shop that gives you a half-price sandwich for every six sandwiches you purchase.

Manufacturers’ use of discount coupons printed in Sunday newspapers.

Polaroid cameras and film.

20.

Third-degree price discrimination occurs when a monopoly separates its customers into distinct markets, charging a different price to each group.

True

False

What is the interest parity condition?

An Individual consumes good X1 and X2. Let W be the wealth of the individual and P1>0, P2>0 be the prices of the goods. For each of the utility functions provide a real life example of two goods X1 and X2 that satisfy them, draw the indifference curves, determine whether preferences are convex, strictly convex or neither, and compute the Walrasian demand, indirect utility function, Hicksian demand, and Expenditure function.

1. U (X1, X2) =(X1^0.4) *(X^0.6)
2. U (X1, X2) =min (X1, X2) +3 max (X1, X2)

ABC plays football with the DEF Club in Mexico. If he does not suffer any injury by the end of the season, he will get a professional contract with GHI, which is worth 10,000 euros. If he is injured, he will get a contract as a fitness trainer in Ecuador, which is only worth 100 euros. The probability of suffering an injury is 10%. He is likely to get through the season unscathed with a 90%-probability.

1. Describe the gamble. How high is the expected value of this gamble?
2. How high is the expected utility, if his Bernoulli utility function of the VNM-utility function is u(x)=x^0.5?
3. Assuming he could buy insurance at the price P that would pay him 9,900 euro in the case of an accident, how high could the maximal value of P be for ABC to still afford the insurance?
4. Interpret the certainty equivalent. How high is the certainty equivalent c of the above gamble?
5. Calculate the coefficients of absolute risk aversion and interpret it. Is that a case of decreasing absolute risk aversion?