1. (True or False) Monopolists are neither productively
efficient nor allocative efficient, and perfect competition is both
productively efficient and allocatively efficient. However, Pareto
optimal requires it is impossible to make one person better off
without making at least one other worse off.
2. Firm 1 and Firm 2 are automobile producers. Each has the
option of producing either a big car or a small car. The payoffs to
each of the four possible combinations of choices are as given in
the payoff matrix below. Each firm must make its choice without
knowing what the other has chosen.
FIRM2
FIRM 1
Big car
Small car
Big Car
(400,400)
(600, 900)
Small car
(1200, 800)
(500,500)
Does either firm have a dominant strategy? Identify the Nash
equilibrium.
3. A monopolist has a demand curve given by P = 100 - Q and a
total cost curve given by TC= 160 + Q2
Find the monopolist's profit-maximizing quantity and price. How
much economic profit will the monopolist earn?
Now suppose the monopolist has a higher fixed cost,
specifically a total cost curve given by 500 + Q2 Find the
monopolist's profit-maximizing quantity and price. How much
economic profit does the monopolist earn?
What is the welfare loss of monopoly power (i.e. the deadweight
loss) in a. and b above.
4. Consider a duopolistic market where demand is given by P
= 36 - 3Q, where Q = Q1 + Q2. For each
duopolist, the constant per unit marginal cost is $18/unit and
fixed costs are zero.
Assume first that the duopolists hold Cournot conjectures when
they make their choices. Find the Cournot equilibrium price,
quantity, and profits.
Now find the equilibrium price, quantity, and profits assuming
the duopolistic competition as Bertrand.
Find the equilibrium um price, quantity, and profit for each
firm, assuming the firms act as a Stackelberg leader and follower,
with Firm 1 as the leader.