Introduction to Economics - I    (Final)

SECTION A

1. Calculate income elasticity of demand by using the income and quantity information given in the following table.  Table and comment on the coefficients of income elasticity of demand for each case:

2. Explain what you understand   from income and substitution effects of a price fall in good X. Draw a graph to distinguish between income effect and substitution affect of a fall in the price of X. (X is a normal good and shown horizontally on the graph and no change in the price of other goods shown vertically as Y) (explain your graph)

3. Give only outline answers to the following:

a)  Define economies of scale

b)  Define consumer's surplus

c)  Define marginal revenue and average revenue 

d)  Define price discrimination

e) Explain the principle of substitution in terms of factors of production

SECTION B

4. Derive and explain the supply curve of the firm in perfectly competitive market in the short run. (assuming the price increases from P0 to P1, from P1 to P2 and from P2 to P3)

5. Suppose that a perfectly competitive firm in the cartel starts cheating. Show and explain the effects of entering the cartel and cheating by the perfectly competitive firm by using graphs.

6. Consider the following game:

    There are two players (A and B) and they are each asked a question. They can answer the question honestly or they can lie. If both answer the question honestly, they each receive a payoff of 200 TL. If one answer honestly and the other lies, the liar receives a profit of 1000 TL and honest player gets nothing. If they both lie, then they each receive a payoff 100 TL.

By using the information given above:

a) Describe this game in terms of their players, strategies and payoffs.

b) Construct the payoff matrix

c) What is the equilibrium for this game and why do you think it is the one?