ps3 - Department of Economics University of California Fall...

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Economics 121 Page 1 Problem Set 3 Department of Economics Fall 2004 University of California Woroch/Lopez/Sydnor Economics 121: PROBLEM SET 3 Due: Tuesday, Nov. 9 (in lecture) TRUE/FALSE/UNCERTAIN and EXPLAIN: 1. According to the Stackelberg model, the dominant firm allows the follower to produce a positive amount because it is not possible to completely exclude him from the market. 2. In a market where firms interact in a repeated context, a monopoly outcome can be sustained as a Nash equilibrium even though many firms operate in the market. 3. The higher the interest rate, the easier it is for firms in the same industry to sustain a collusive outcome. MULTI-PART QUESTIONS 1. In the mainframe computer industry of the 1970s, IBM was clearly a dominant supplier yet it did face entry threats. To examine its behavior toward competitors, suppose that IBM produces q 1 and it incurs a cost of c 1 (q 1 ) = 6 q 1 measured in hundreds of thousands of dollars. IBM faces potential entry by Fujitsu, the Japanese mainframe maker. Fujitsu produces a computer that is a perfect substitute for the IBM machine but its production costs are: c 2 (q 2 ) = 100 + 12 q 2 where q 2 is Fujitsu’s production level and costs are measured in hundreds of thousands of dollars. Inverse demand for mainframes is given by p(Q) = 120 - Q , where Q = q 1 + q 2 is the total production by IBM and Fujitsu, and again price is measured
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ps3 - Department of Economics University of California Fall...

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