# (a) Trailaway's Profits

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1. (40 total points, 40 minutes, 5 points for each question) Decide whether each of the following statements is True, False or Uncertain, and give a brief but clear explanationsupporting your answer. Most of the credit will be given for your explanation.A.If a firm having market power charges a price for its output that is less than its marginal cost, it should shut down and cease production. B.Dominique is planning to bid on an antique piece of fine jewelry in a second price sealed bid auction. Dominique’s private value for the antique jewelry is \$10,000. Dominique should bid no more than \$10,000 for the antique jewelry.C.Greater diversity among suppliers makes collusion more likely to emerge, since there is more likely to be something for everyone in the market.D.A monopolist’s long-run supply curve is that portion of its long-run marginal cost curve above its long-run average total cost curve.E.The demand for refrigerators is characterized by a partial adjustment process (inertia). Suppose a \$250 tax is imposed on new refrigerators. The share of the burden of this tax borne by consumers (as opposed to producers) will rise.F.Deductibles and cost sharing copayments are tools used by insurers to mitigate or counter the effects of consumers’ adverse selection into health care insurance plans.G.Consider a Cournot game in which a Prisoners’ Dilemma-like payoff matrix is repeated a known finite number of times. In such a case, a tit-for-tat strategy is optimal. H.Whenever a firm has market power and can set its own output prices, deadweight loss will occur. Therefore, any firm having market power reduces economic efficiency compared to a perfectly competitive market outcome.2. (30 total points, 30 minutes) Workers must travel from Residentsville to the Workplace copper mine and return every day. On a monthly basis, the inverse demand for bus rides is given byP = 300 – 4Qwhere P is in cents per ride and Q is in thousands of rides. The marginal cost of each ride is 50 cents (there are no economies of scale and no fixed costs).

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