rev101x - Midterm Information Please bring bluebooks and...

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1 1 Midterm Information Midterm Information Please bring bluebooks and calculators. No notes will be allowed for the exam. Exam runs from 3:30 to 4:45 Exam will be 4 questions (each question will have 4 or 5 parts) Please sit in every other chair. Two rooms for exam: Dodd 147 (lecture room) and Dodd 175. You may sit in either room. 2 Possible Questions Possible Questions Monopoly - One firm sells in one market - Incentives—owner versus manager - Price discrimination in separate markets Transportation cost Capacity constraint - Monopoly producing a multiple plants - Quantity discrimination - Perfect price discrimination and two-part tariff Imperfect competition and oligopoly - Price leadership and dominant firm - Cournot, Stackelberg, & Bertrand models - Spatial competition - Contestable markets Game theory - Dominant strategy - Nash equilibrium - Prisoner’s dilemma - Sequential games - Pure and mixed strategies - First mover advantage
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2 3 #1 #1 . Distorted Incentives . Distorted Incentives A financial planner writes a program that forecasts stock market prices. He authorizes a software company to market his “invention,” and the software company agrees to pay a 15 percent royalty on each product sold. The demand for the software is given by Q=100,000-500P and the software company’s production costs are given by TC=10,000+50Q. 4 #1 continued continued a) Find the profit maximizing price and quantity for the software company. The software company gets 85 percent of TR, since 15 percent goes to the planner Inverse demand is P=200-.002Q • π S =.85[(200-.002Q)Q]-[10,000+50Q] d π S /dQ = 170-.0034Q -50 = 0 Q*=35294 and P*=129
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3 5 #1 continued continued b) Find the profit maximizing price and quantity for the planner. The planner’s earnings are just a function of TR for the software company, so he/she ignores the software company’s costs • π S =.15[(200-.002Q)Q] d π S /dQ = 30-.0006Q = 0 Q*=50,000 and P*=100 6 #1 continued continued c) Explain the inherent conflict between the goals of the company and the programmer. How might this conflict be resolved? The planner will encourage the company to cut the price and sell more output, but the company will resist Profit sharing would work better, because both parties would agree on the output decision in part A. The problem with profit sharing is that the software company would have no incentive to control costs (e.g., the software company might distort production costs to increase their rewards)
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4 7 #2 #2 Two Two -Part Tariff Part Tariff Ace Gym is a new health club in Brooklyn, Iowa. The club has monopoly power in the local area and deals with two types of consumers. -
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This note was uploaded on 12/08/2008 for the course ECON 101 taught by Professor Buddin during the Spring '08 term at UCLA.

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rev101x - Midterm Information Please bring bluebooks and...

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