Eco204y Final 2012s

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UNIVERSITY OF TORONTO

Faculty of Arts and Sciences

August Examinations 2012

ECO 204 Y1Y

Duration: 3 hours Total Points: 100 points

Examination Aid Allowed: Calculator.

Instructions:

- This exam consists of 6questions in 29 pages, double-sided.

Please Write Your Name and ID # (as these appear in ROSI)

Last Name:

First Name:ID #

YOU CANNOT LEAVE THE EXAM ROOM DURING THE LAST 10MINUTES

PLEASE REMAIN SEATED UNTIL THE PROCTOR ANNOUNCES THAT YOU CAN LEAVE THE ROOM.

IF YOU DETACH ANY PAGES THEN ITS YOUR RESPONSIBILITY TO RE-STAPLE THE PAGES

KEEP ANSWERS AS BRIEF AS POSSIBLE

THERE ARE 2 WORKSHEETS AT THE END OF THIS EXAM

Graders: Please Input Scores Below

Question Maximum Possible Points Score

Question 1 15

Question 2 15

Question 3 20

Question 4 15

Question 5 20Question 6 15

Total Points = 100

Final Exam Checked by Instructor? Yes No

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ALL QUESTIONS IN THIS FINAL EXAM ARE BASED ON THE FOLLOWING INFORMATION ABOUT AMD AND INTEL

The economist,Hugo Salgado,estimated the following demand models forIntel andAMD PC (personal

computer) CPU chips (Central Processing Units):

The subscripts and refer to AMD and Intel respectively where CPU and quantity of

CPUs (millions). Notice these demand models are of the form ( )and ( )

respectively.

Hugo also estimated AMD and Intels average variable cost1:

Throughout this final exam assume that AMD and Intel: are in the short run have ample capacity

and will always produce strictly positiveoutput (i.e. ).

ALL QUESTIONS MUST BE ANSWERED SEQUENTIALLY

ANSWERS TO STARRED *QUESTIONS WILL BE NEEDED TO ANSWER OTHER QUESTIONS.

IF YOU GET STUCK ON A QUESTION THAT DOES NOT HAVE A STAR *THEN YOU SHOULD MOVE ON AND COME BACK LATER

PLEASE CALCULATE ALL ANSWERS TO 3DECIMAL PLACES

1The cost figures used in this final exam are slightly different from theoriginal estimates.For this final

exam use , .
http://www2.udec.cl/~husalgad/hugosalgado'shomepage.htmlhttp://www.intel.co.uk/content/www/uk/en/homepage.htmlhttp://www.amd.com/us/Pages/AMDHomePage.aspxhttp://www2.udec.cl/~husalgad/hugosalgado'shomepage.htmlhttp://www2.udec.cl/~husalgad/hugosalgado'shomepage.htmlhttp://www2.udec.cl/~husalgad/hugosalgado'shomepage.htmlhttp://www2.udec.cl/~husalgad/hugosalgado'shomepage.htmlhttp://www.amd.com/us/Pages/AMDHomePage.aspxhttp://www.intel.co.uk/content/www/uk/en/homepage.htmlhttp://www2.udec.cl/~husalgad/hugosalgado'shomepage.html

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Question 1 [15Points]

* (1.1)[5Points] What kind of returns to variable inputs do AMD and Intel have? Give a brief

explanation.

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* (1.2)[5Points] SupposeAMD and Intel each have the following type of production function:

Here output technology & management parameter fixed labor fixed capital

variable materials are parameters.

What is the numerical value of AMDs parameter ? What is the numerical value of Intels parameter ?

Hint: Both companies have the same value of . Show all calculations.

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(1.3)[5 Points] Suppose AMDs production function is:

where AMDs output

AMDs technology & management parameter labor at AMD capital at AMD

materials at AMD are parameters.

Suppose Intels production function is:

where Intels output Intels

technology & management parameter labor at Intel capital at Intel materials at

Intel are parameters.

Assume that AMD and Intel are currently: employing the same amount of labor (i.e. ) using

the same level of capital (i.e. ) have identical parameters face identical input prices.

True or false: AMDstechnology and managementis superior to Intel? Show all calculations and state

all assumptions. Hint: Both Intel and AMD pay the same price for materials.

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* (2.1)[5Points] Transform AMDs given demand model:

( )

into the demand model ( ). You will use this model later. Show all calculations.

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* (2.2)[5Points] Transform Intels given demand model:

( )

into the demand model ( ). You will use this model later. Show all calculations.

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* (2.3)[5Points] Use your answers to parts (2.1) and (2.2) to derive the following two demand models

for AMD and Intel respectively: ( ) ( ). You will use these models later. Show

all calculations.

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(3.2)[5Points] What would be the impact on AMDs monopoly profits due to a hypothetical $1 increase

in its marginal cost (in this question only)? Show all calculations.

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* (3.3)[5Points] Use Intels demand model from part (2.3) to answer this question.Suppose Intel is a

monopolist -- calculate Intels profit maximizing output and price. Show all calculations.

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(3.4)[5Points] What would be the impact on Intels monopoly profits due to a hypothetical $1 decrease

in its marginal cost (in this question only)? Show all calculations.

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* Question 4 [15Points]

Suppose AMD and Intel compete as Bertrand oligopoly rivals. Calculate each companys optimal output

and price. Show all calculations.

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* (5.1)[10Points] Suppose AMD and Intel can charge eitherthe monopoly price orthe Bertrand

oligopoly price. Please calculate and enter below the quantities, contribution margins, and gross margins

(profits) for all four price combinations. Show all calculations and state all assumptions.

ENTER EACH COMPANYS CONTRIBUTION MARGIN FOR ALL 4PRICE COMBINATIONS

Intel charges

Monopoly Price Oligopoly Price

AMD

charges

Monopoly Price

Oligopoly Price

CALCULATE BELOW AND ENTER HERE EACH COMPANYS QUANTITY FOR ALL 4PRICE COMBINATIONS

Intel charges


AMD

charges

Monopoly Price

Oligopoly Price

CALCULATE BELOW AND ENTER HERE EACH COMPANYS GROSS PROFITS FOR ALL 4PRICE COMBINATIONS

Intel chargesMonopoly Price Oligopoly Price

AMD

charges

Monopoly Price

Oligopoly Price

Below are the 4 set of calculations you need to do:

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AMD charges monopoly price and Intel charges monopoly price

AMD charges oligopoly price and Intel charges monopoly price

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AMD charges monopoly price and Intel charges oligopoly price

AMD charges oligopoly price and Intel charges oligopoly price

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* (5.2)[5Points] SupposeAMD and Intel play a one shot non-cooperative simultaneous move game in

which each company can charge eitherthe monopoly price orthe Bertrand oligopoly price. Solve

for the pure strategies Nash Equilibrium and indicate whether this is a prisoners dilemma game.

ENTER EACH COMPANYS GROSS MARGIN (GROSS PROFITS)FOR ALL 4PRICE COMBINATIONS

AND

SOLVE FOR THE PURE STRATEGY NASH EQUILIBRIUM

Intel charges


AMD

charges

Monopoly Price

Oligopoly Price

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(5.3)[5 Points] Please answer this question according to the last digit of your ID #:

If your ID # ends in 0, 2, 4, 6, or 8 Suppose that AMD and Intel play the simultaneous move game in

part (5.2) repeatedly forever. Suppose that in some period, AMD plays the cooperative price -- when

will Intel cooperate with AMD? If required use

where is the interest rate to discount cash

flows. Show all calculations.

If your ID # ends in 1, 3, 5, 7, or 9Suppose that AMD and Intel play the simultaneous move game in

part (5.2) repeatedly forever. Suppose that in some period, Intel plays the cooperative price -- when

will AMD cooperate with Intel? If required use

where is the interest rate to discount cash

flows. Show all calculations.

ENTER EACH COMPANYS GROSS MARGIN (GROSS PROFITS)FOR ALL 4PRICE COMBINATIONS

Intel charges


AMD

charges

Monopoly Price

Oligopoly Price

For your convenience you may wish to enter the gross margin figures from above:

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(6.1)[5Points] Please answer this question according to the last digit of your ID #:

If your ID # ends in 0, 2, 4, 6, or 8 Assume AMD is a monopolist and is charging the profit

maximizing price (calculated earlier) What is the AMD representative consumers utility level of

consuming AMD CPU chips? What is the AMD representative consumers utility function (equation)

of consuming AMD chips and everything else? Show all calculations and state all assumptions.

If your ID # ends in 1, 3, 5, 7, or 9Assume Intel is charging the profit maximizing price (calculated

earlier) What is the Intel representative consumers utility level of consuming Intel CPU chips?

What is the Intel representative consumers utility function (equation) of consuming Intel chips and

everything else? Show all calculations and state all assumptions.

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If your ID # ends in 0, 2, 4, 6, or 8 Use a consumer surplus argument to calculate the impact on

the AMD representative consumers total utility level due to a 1% excise tax on AMD chips. Show all

calculations and state all assumptions.

If your ID # ends in 1, 3, 5, 7, or 9? Use a consumer surplus argument to calculatethe impact on

Intelsrepresentative consumers total utility level due to a1% excise tax on Intel chips. Show all

calculations and state all assumptions.

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If your ID # ends in 0, 2, 4, 6, or 8 Use a UMP argument to calculate the impact on the AMD

representative consumers total utility level due to a 1% income tax? Show all calculations and state all

assumptions.

If your ID # ends in 1, 3, 5, 7, or 9? Use a UMP argument to calculate the impact on the Intel

representative consumers total utility level due to a 1% income tax? Show all calculations and state all

assumptions.

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WORKSHEET

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WORKSHEET

Eco204y Final 2012s

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