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Unformatted text preview: Econ 132 Sample Questions for Final (with suggested solutions) 1 Cournot Model Suppose that the market inverse demand for mountain spring water is P = 1200 Q. Mountain spring water can be produced at no cost. o What is the profit maximizing level of output and price of a monopolist? P = 600; Q = 600 o What level of output would be produced by each firm in a Cournot duopoly in the long run? What will price be? P = 400; Q 1 = Q 2 = 400 Bartels and Jaymes are two individuals who discover a stream that flows wine cooler instead of water. Bartels and Jaymes decide to bottle the wine cooler and sell it. The marginal cost of bottling wine cooler and the fixed cost to bottle wine cooler are both zero. The market inverse demand for bottled wine cooler is P = 90 - 0.25Q where Q is the total quantity of bottled wine cooler produced and P is the market price of bottled wine cooler. o What is the economically efficient price of bottled wine cooler? P = 0 o What is the economically efficient quantity of bottled wine cooler produced? Q = 360 o If Bartels and Jaymes behave as a cartel, how much bottled wine cooler will they produce? Q = 180 o What price will Bartels and Jaymes charge for bottled wine cooler if they behave as a cartel? P = 45 o What is the deadweight loss in this market if Bartels and Jaymes act as a cartel? DWL = 4050 o Suppose that Bartels and Jaymes act as Cournot duopolists. What are the reaction functions for Bartels and for Jaymes? Q B = 180 0.5Q J and Q J = 180 0.5Q B o What level of output will Bartels produce if Bartels and Jaymes act as Cournot duopolists? Q B = 120 o What will be the price of wine coolers be if Bartels and Jaymes act as Cournot duopolists? P = 30 o Suppose that after Bartels and Jaymes have arrived at their long run equilibrium as Cournot duopolists, another individual, Paul Mason, discovers the streams. Paul Mason, who will sell no wine cooler before its time, decides to bottle wine coolers. There are now three Cournot firms producing at once. In the long run, what level of output will Bartels produce? Q B = 90 Consider two identical firms (Firm 1 and Firm 2) that face a linear market demand curve. Each firm has a marginal cost of zero, a fixed cost of zero, and the two firms together face inverse demand P = 150 - 0.5Q where Q = Q 1 + Q 2. o Find the Cournot equilibrium quantity, price, and profit for each firm. Q 1 = Q 2 = 100; P = 50 o Find the cartel equilibrium quantity, price, and profit. Q = 150; P = 75 o Contrast the efficiencies of the markets in (a) and (b) above. Efficient price = 0; Cournot price is closer to the efficient price than the cartel price. Econ 132 Sample Questions for Final (with suggested solutions) 2 Borenstein, Bushnell, & Knittel (1999) Deregulation in electricity markets focused on making the ________ more competitive....
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- Spring '07