Problem Set 1

Problem Set 1 - ECON 106E Economics of Entrepreneurship...

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ECON 106E – Economics of Entrepreneurship Prof. Ackerberg Problem Set #1 Due Tuesday, May. 8 th at Beginning of class LATE PROBLEM SETS WILL NOT BE ACCEPTED!!!! 1) True, False, or Uncertain - be sure to provide a brief but clear explanation of your rationale. a) When considering the competitive situation in an industry, you should consider the market power of the buyers of your product, but do not need to worry about market power of suppliers of the materials you use to produce the product. b) Suppose that you produce two products, A and B, each with zero marginal cost. There are 3 consumers, Tom, Sandy, and Mike. The consumers’ reservation utilities for the 2 goods are given by: Good A Good B Tom $10 $8 Sandy $8 $10 Mike $5 $5 Your optimal pricing strategy (assuming that 1 st degree price discrimination is not possible) is to practice bundling, selling the bundle of A and B together for $10. c) Suppose for your new product you expect there to be significant learning by doing, i.e. you expect your costs to go down as you produce more and more of the product. You should set the initial price of your product higher than you would otherwise (i.e. if there was no learning by doing). d) Suppose you are selling both a men’s and women’s version of a new bicycle. Through market research, you have determined 1) that the demand curve for the men’s product is more inelastic than the demand curve for the women’s product, and 2) that both products have approximately the same
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Problem Set 1 - ECON 106E Economics of Entrepreneurship...

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