ECON 224 Name:
Fall 2020
Problem Set #6
Instructions: Due on Dec 11th (final exam day) at 9:00am. Please turn in your answers via
uploading them on Blackboard. You may use your computer to type your answers and draw
graphs, or you may use pen and paper and upload your work as scanned images. (photos are
fine)
1. Pick one product from Amazon’s website. (for instance, Apple Watch Series 6 or Nutella
Hazelnut Spread 13 oz or the Lord of the Rings Trilogy Extended Edition Blu-ray Box Set)
(a) How would you describe the market for your product? Who comprises the demand?
Who is the supplier?
(b) Draw a demand and supply diagram for your product.
(c) On the demand curve, what consumers would be located more to the left? (Hint: think
about the types of consumers with the highest willingness to pay).
(d) Compare your product’s price on Amazon to its price at a retailer such as Walmart
or Target. Which one is higher? Do you think the market for your product is at its
equilibrium? Why or why not?
(e) Write down 2 possible substitutes for your product (they don’t have to be perfect substitutes).
Explain your reasoning.
(f) Suppose there is a decrease in price in one of those substitutes. Show the effect of this
change on the equilibrium price and quantity of your product using the demand and
supply diagram you plotted in part (b).
(g) Do you think the market for your product more resembles to a perfectly competitive
market or a monopoly? (Hint: the seller has more power in a monopolistic market,
enabling them to charge a higher price than in a perfectly competitive market).
(h) List some of the fixed costs and variable costs associated with the production of your
product.
2. What are the pros and cons of implementing a minimum-wage policy? Explain using a
demand and supply diagram.
3. Go to https://www.gasbuddy.com/Charts Under Customize Chart, select your hometown
state as Area 1. For Area 2, select a neighboring state. Leave Area 3 blank at the moment.
(a) Select time period as 1 Month. How does the gas prices in your state compare to the
neighboring state for the past month? Which one is higher?
(b) Did the average gas price for the past month remain somewhat constant, or it greatly
increased/decreased?
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ECON 224: Problem Set #6
(c) Do you think the gas prices highly fluctuate on this graph? Why, or why not?
(d) Now, select the time period as 5 Years.
(e) Did the average gas price for the past five years remain somewhat constant, or it greatly
increased/decreased?
(f) Do you think the gas prices highly fluctuate on this graph? Why, or why not?
(g) Does the gas price in your hometown state follow a similar pattern to the gas price in
the neighboring state?
(h) Lastly, add the USA Average for Area 3. Where is the U.S. average gas price located
on the graph? Is it highly above, below, or between your hometown state and the
neighboring state? Why do you think the U.S. average is located at where it is?
4. Below is a game matrix representing game a played between Congress, which is responsible
for fiscal policy (taxes and government expenditures), and the Federal Reserve (FED), which
is in charge of monetary policy (primarily, interest rates)
Federal Reserve
Low interest High interest
Congress High tax 3, 4 1, 3
Low tax 4, 1 2, 2
(a) What is the Nash Equilibrium of this game?
(b) Is there a dominant strategy for any of the players? If so, what are they?
(c) Is the Nash Equilibrium outcome socially desirable? Is there a different outcome where
the society would be better off than in the case of Nash Equilibrium? If so, what is it?
(d) Suggest a solution on how the players can cooperate and achieve the socially desirable
outcome.
5. Consider a modified version of the ”guess the half of the average” game discussed in class. In
this version, players submit a number between 1−100 and the player who submits a number
10 points larger than average of all the numbers submitted wins the game (If the average is
x, the winning number is determined as x + 10). If all players play optimally, what will be
the winning number?
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ECON 224: Problem Set #6
6. Below is a game of firm entry where Firm 2 (entrant) moves first and decides on entering or
staying out of the market. Firm 1 (incumbent) moves second and decides on whether to fight
or not fight.
Firm 2
Firm 1
(0, 1)
f ight
(3, 2)
don0
t f ight
enter
Firm 1
(1, 8)
f ight
(0, 9)
don0
t f ight
don0
t enter
(a) What is the Nash Equilibrium of this game? (Hint: You should use backward induction.)
(b) Is there a dominant strategy for Firm 1? If so, what is it?
(c) Is there a first-mover advantage in this game? (Hint: You can draw another game tree
where Firm 1 moves first and compare the payoffs firms get in the Nash Equilibrium).
7. Suppose firms want to hire employees for their businesses. They have a pool of candidates
whom they will be interviewing soon. Firms know that there are two types of employees:
extra-hardworking employees (plums) and not-so-hardworking employees (lemons). They
are willing to pay at most $20,000 to a lemon worker and $80,000 to a plum worker. On the
other hand, plum workers want a salary of at least $60,000 and lemon workers want at least
$10,000.
(a) Assume there is perfect information where firms know whether an employee is a plum
or a lemon. What will happen in equilibrium?
(b) Assume there is imperfect information where firms don’t know whether an employee is
a plum or a lemon. What salary should you offer to a candidate employee?
(c) What is the equilibrium in the case of imperfect information? What workers are driven
out of the market?
(d) Propose a solution to the adverse selection problem observed in this market.
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