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Unformatted text preview: Economics 106P E. McDevitt Study Questions-Set #1 1. Assume that an industry with two firms face the following market demand curve: P = 90-Q, where Q= Q 1 + Q 2 . Marginal cost is constant at $10 for each firm. a. What is the joint profit-maximizing output (that is, monopoly output)? What is price at this output? What is joint profit at this output? b. What is each firm's equilibrium output if they behave non-cooperatively? Use the Cournot model. What is price? What is each firm's profit? Draw each firm's reaction curve and show the equilibrium. c. Suppose the industry consists of 19 identical firms. What is the Cournot outcome now? Assume the industry consists of 79 identical firms. What is the Cournot Solution in this case? d. What is each firm's equilibrium output and profit under the Stackelberg model. Assume Firm 1 sets its ouput first. What is price? What is the equation for the residual demand curve facing Firm 1? e. What is price and profit in the Bertrand Model with identical products? 2. Consider the Bertrand Model with differentiated products. Assume the following demand functions: Firm 1's demand: Q 1 = 20-2P 1 +P 2 Firm 2's demand: Q 2 = 20-2P 2 +P 1 MC = 2 for both firms. a. Find the profit-maximizing price for each firm. What is each firm's quantity and profit at these prices? b. Draw each firm's reaction curve and show the equilibrium set of prices. c. If the firms were to collude and set a single price, then what price what maximize their joint profits? What is total output and joint profit at this price? 3. Firm A is the dominant firm in an industry consisting of itself and many other small firms. The market demand is given by Q M = 1200-0.5P. The supply curve for the fringe firms is Q SF = -300 + 0.5P and MC of the dominant firm is $700. a. Find the dominant firm's residual demand curve. b. Find price, dominant firm output, and fringe firm output in this industry. c. What is the dominant firm's profit? d. Draw a graph the showing the above. e. Suppose the supply curve for the fringe firms becomes flatter (assume the same vertical axis intercept value)--that is, becomes more elastic. How will this influence the price charged by the dominant firm. Show your answer on a graph. 4. Consider the following promotion game between two department stores. Each must decide what kind of product to promote. Department Store 2 Promote Product X Promote Product Y Promote X 0,0 4,2 Department Store 1 Promote Y 2,2 2,4 a. Does either store have a dominant strategy? b. Find the Nash equilibrium for this game. 5. Two major networks are competing for viewer ratings in the 8:00-9:00 p.m. and 9:00-10:00 pm. slots on a given weeknight. Each has two shows to this time period and is changing its lineup....
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- Summer '08