Principles of Economics for Scientists

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Samenvatting vna de twee delen (2015-2016) on ShareLaTeX Oplossingen van de oefeningen uit Cabral's handboek kunnen op zijn website gevonden worden, de belangrijkste staan hier



Both parts count for 50% of the final score each. The questions about part II didn't come from the document with possible exam questions this time.

Part 1

  1. Given the demand and supply for labour, find the equilibrium if employers pay 25% tax on the gross wage and employees pay 50% of their wage in taxes. Calculate the wedge created by taxes.
  2. Given marginal cost and an inverse demand function, calculate the equilibria under monopoly and perfect competition. Calculate the wellfare loss due to monopoly.
  3. I can't remember this one rn
  4. There's two technologies, A and B. Tomorow, one of them becomes the standard and the other will be obsolete. They both give a utility of 80 per period if they're the standard, or 0 if they're obsolete. They have an infinite lifespan and the interest rate is 10%. Technology A costs 250 and has 66% chance of becoming standard. Technology B costs 150 and has 34% chance of becoming standard. Which one has the highest expected utility today?

Part 2

  1. A new technology is invented that will lower the marginal cost of beer production from 70 to 60. The inverse demand for beer is p = 100 - q. The inventor of the technology has acquired a patent and will license the sole rights to the technology to the highest bidder.
    1. Calculate the willingness to pay of a sole monopolist.
    2. Calculate the willingness to pay of a firm in a Bertrand oligopoly with n players.
    3. Cournot duopoly: You're given the price and total quantities sold before the technology is licensed (MC = 70 for both firms) and after the license is sold (MC = 70 for firm 1 and 60 for firm 2), show that these are correct, calculate the profit of both firms and the willingness to pay of both firms.
    4. Incumbent versus entrant: A monopolist is threatened by a new entrant. The entrant will only enter the market if they get the license. Calculate the willingness to pay for both the monopolist and the entrant. Discuss the impact of this technology on the market structure if the license goes to the highest bidder.
    5. Now you've solved the previous questions, which market structure gives the highest incentive to pay for the license? Make a ranking, and give comments. Is this result specific to this situation or likely to be general?
  2. Bonus question: Now you know the impact of the patent in the previous question, do you think it's a good thing that the creator was able to acquire a patent? Elaborate your answer.


All questions about Part II (Question 3-6) came from the document with possible exam questions as posted on Toledo.

  1. Monopolist vs perfect competition. Calculate equilibria. Q = 300 - 3P. MC = 15
  2. (Utility) U(D,F) = DF. D being days on holiday domestically. F being days on holiday in a foreign country. Eric has a budget of 8000. Price of D is 160. Price of F 200. Calculate optimal utility. How many D vs F?
    1. Price of D becomes 250. Budget is x. Calculate D and F in function of x.
      • What budget x should Eric have to have the same utility as before?
      • Calculate D and F with that budget.
    2. Using your previous answers, discuss the effect of income and substitution.
  3. (NPV and PDV) Start a playground in an old industrial building costs 200000, lifetime benefits are 700000. However, there’s a 20 percent chance that the city board decides to change the purpose of the place where the industrial building is located on. Interest rate of 10%.
    • What’s the net present value?
    • What’s the net present value today, if you wait a year when the decision about the location is made by the city.
  4. Two firms compete (a la Cournot) in the cement market. Demand for cement is given by Q = 450 − 2 P. Firm 1’s marginal cost is constant at 50, firm 2’s at 40. A technological innovation allows firms to reduce marginal cost by 6.
    1. How much would each firm be willing to pay for the innovation if it were the only competitor to acquire it?
    2. Suppose the innovation costs 600. Consider a “metagame” where firms first simultaneously decide whether to acquire the innovation and then compete a la Cournot with whatever marginal cost results from the first stage.
      • What is the equilibrium of the 2x2 game played by firms at the technology choice stage?
  5. The Bertrand model of price competition suggests that, under a given set of conditions, firms make zero economic profits even if there are only two firms. However, there are many instances of industries with a small number of competitors where firms appear to earn more than zero economic profits.
    • Give an example of an industry dominated by a couple of firms where profits are significant.
    • Explain why the predictions of the Bertrand model are not borne out.
  6. Suppose that Ericsson and Nokia are the two primary competitors in the market for 4G handsets. Each firm must decide between two possible price levels: $100 and $90. Production cost is $40 per handset. Firm demand is as follows: if both firms price at 100, then Nokia sells 500 and Ericsson 800; if both firms price at 90, then sales are 800 and 900, respectively; if Nokia prices at 100 and Ericsson at 90, then Nokia’s sales drop to 400, whereas Ericsson’s increase to 1100; finally, if Nokia prices at 90 and Ericsson at 100 then Nokia sells 900 and Ericsson 700.
    • Suppose firms choose prices simultaneously. Describe the game and solve it.
    • Suppose that Ericsson has a limited capacity of 800k units per quarter. Moreover, all of the demand unfulfilled by Ericsson is transferred to Nokia. How would the analysis change?
    • Suppose you work for Nokia. Your Chief Intelligence Officer (CIO) is unsure whether Ericsson is capacity constrained or not. How much would you value this piece of info?

Under construction.