Question

7) If an average cost pricing rule is imposed on the natural monopoly shown in the figure above, then consumer surplus will be
A) $16 million.
B) $0.
C) $8 million.
D) $9 million.

8) The most efficient way to encourage the growth of an infant industry is through
A) an import quota.
B) a subsidy.
C) a tariff.
D) a voluntary export restraint.

9) Kellogg's and General Mills are two of the dominant breakfast cereal manufactures in the U.S. Each firm can either sign or not sign an exclusive contract with an Olympian gold-medal athlete to appear on the cover of a cereal box. Both Kellogg's and General Mills have signed athletes in 2008, Michael Phelps and Nastia Liukin, respectively. What does this suggest about the outcome of the oligopoly game?
A) The Nash equilibrium must be that both companies sign.
B) The highest profits are when both companies sign.
C) The Nash equilibrium must be that both companies sign and this always leads to the highest profits.
D) The best outcome, in terms of profit, is where both companies sign.

10) One of the best defenses we have against malaria these days comes from a fern-like weed called wormwood. Fluctuating supply and demand have pushed the plant's price from $155 per kilo one year, to over $1000 the next. There is a push to set a price ceiling for the plant. Which of the following would NOT occur if there was a price ceiling set below the equilibrium price on wormwood?
A) A black market for wormwood may be created.
B) The wormwood market would be allocatively efficient because its price would not fluctuate.
C) There would be an increase in inefficiency in the wormwood market.
D) A wormwood shortage might occur.

Answer 1

Graph of question 7 is missing.

Answer 8:

Option C. Tariff increase the price of imported goods and thus is an efficient way to protect the infant industries from foreign competition.

Answer 9;

Option A. The Nash equilibrium in such games occurs when both the companies sign the agreement because both will want to advertise their product thinking that another company with also advertise, thus, both will end up advertising their product. Though they will earn higher profits by not advertising because it will reduce their cost but Nash Equilibrium will occur when both companies will advertise their product.

Answer 10:

Option B. When the price ceiling is set below the equilibrium price, then it is effective and will create black market for wormwood, will lead to shortage of wormwood in the market and will also create inefficiency in the market because of deadweight loss. It will not make the market allocatively efficient because of shortage in the market.