Econ 100 – Introduction to Economics
Test 2 – Do at Home
Name:
Date:
Student Number:
Suggested Time:
1 hour
Instructor:
Shora Ebrahimi
Grade:
/50
Instructions:
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Ensure student name and number appear on the top of this question sheet.
For each question, you must explain the steps to receive marks.
All your answers must be shown in the space provided under each question. If you need
more space, that means you are writing too much.
I will not grade any tests which are not written neatly and are not stapled.
You can work together, but each of you must hand in a separate exam and I should not be
able to tell which students have worked together by reading the answers. Meaning: Even if
you work together, you have to write the answers in your own words. Similar exams will be
treated as plagiarism and will receive a zero grade.
1.
Clay College is in in need of a new air-conditioning system and also a new office for
instructors but doesn’t have enough money for both. Mr. Jones, a benevolent donor, has
written a cheque for the college with specific instructions that the money must be spent
on the new office only. He has specified that he doesn’t see any need for an airconditioning system, as Vancouver has a very mild weather and it is just a waste of
money. Clay college accepts the cheque and builds the office. Briefly explain what Mr.
Jones has paid for.
2.
If you want to buy a candy bar, you pay pretty much the same price in Vancouver and in
Calgary. If you want to buy a house, you pay a much higher price for the same house in
Vancouver than in Calgary. Why the difference between candy bars and houses?
3.
One divorce law specifies that as long as one person in a marriage wants a divorce, a
divorce will be granted. A second divorce law specifies that before a divorce is granted,
both people in the marriage must agree to the divorce. Under which divorce law, will
there be more divorces? Explain precisely. You can use an example if you want to clarify
your answer.
4.
Consider Frank and Fatima who are taking an Economics course in college. Each week,
Frank studies Economics for two hours and Fatima studies Economics for one hour. What
is a possible economic explanation for this? Think like an economist.
5.
Consider a simple case of capacity addition. Say two competitors, A and B, are considering
adding capacity. If competitor A adds capacity and B doesn’t, A gets an outsized payoff.
Likewise, if B adds capacity and A doesn’t than B gets the large payoff. If neither expands,
A and B aren’t as well-off as if one alone had added capacity. But if both add capacity,
they’re worse off of than if they had done nothing.
Firm B
Firm A
Adds Capacity
Adds Capacity
(1,1)
No Change
(20,0)
No Change
(0,20)
(8,8)
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What is the best response of Firm A, if firm B decides to add capacity?
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What is the best response of Firm A, if firm B decides not to add capacity?
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What is the best response of Firm B, if firm A decides to add capacity?
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What is the best response of Firm B, if firm A decides not to add capacity?
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What is the equilibrium outcome of this game?
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Is there a better outcome for both parties than the equilibrium outcome? If yes, why
can’t they achieve this?
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