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Directions:Download the examination between 12:00 am December 18 and 8:00 pm December 31, 2011.This is an open book exam. Please print your name clearly below and on each page of youranswer sheets. Once downloaded, you are allowed to complete the examination in four hours-- three hours in total to focus on the examination, and one hour to allow fordownloading/uploading technology-related logistical snafus. It would be best if you take theexamination all in one setting. However, the examination and answers must be uploaded backwithin 24 hours of it being downloaded (download and upload times will be time stamped). Noexaminations will be accepted after midnight, December 31, 2011.Answer all questions as clearly and legibly as possible. The exam has a total of 180 points. Thenumber of points and a suggested amount of time is indicated for each question. In order toobtain full credit for your answers, you need to show your work. If you believe a question isambiguous, in your answer state clearly any assumptions you are making.Please read and sign below:
1. (18 points, 18 minutes). Decide whether each of the following statements isTrue,FalseorUncertain, and give abrief but clear explanationsupporting your answer. Most of the creditwill be given for your explanation.a.Both in perfect competition and in monopolistic competition, in long run equilibriumeconomic profits are zero.b.If the quantity demanded for your product varies greatly with changes in customerper capita incomes, this implies you face an elastic (flat) demand curve.c.The Commonwealth of Massachusetts taxes each bottle of alcohol sold. Assume theprice elasticity of demand for wine is -5, the price elasticity for hard liquor is -2, andthat the price elasticity of supply is the same for both types of alcohol at +2.True/False/Uncertain: A larger fraction of the alcohol tax will be passed on to hardliquor consumers than the fraction passed on to wine consumers.d.With sequential Bertrand competition in a market for two slightly differentiatedproducts, it is generally preferable to be the player who prices second rather thanthe one who goes first.e.The average annual probability of a five year old dog having a urinary tract infectionis 20%; the average annual cost of treating a five year old dog’s urinary tractinfection is $150. Therefore, an animal health insurer offering an insurance policycovering urinary tract infections for five year old dogs that charges an annualpremium of $30 can be expected on average to break even.
2. (18 points, 18 minutes). An econometric analysis of gasoline sales and price data providedthe following gasoline demand equation estimates (ln refers to the natural logarithm):ln Qt= 3.5 – 0.16 ln PGt+ 0.20 ln INCt+ 0.8 ln Qt-1where Qtand Qt-1are current time period and one time period-lagged quantities of gasoline (inhundreds of gallons), respectively, PGtis the current period price of gasoline in dollars, and INCtis per capita income in dollars.a.What is the short-run price elasticity of demand for gasoline? What does this meanin words?b.What is the long-run price elasticity of demand for gasoline? Does it make sense inthis case that the long-run elasticity is different from the short-run elasticity? Whyor why not?c.What does this imply for the volatility of gasoline prices in the short-run vs. the longrun in response to oil price shocks that shift the supply curve for gasoline? Why?
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