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ECON 414 problem set 2 spring 2010

ECON 414 problem set 2 spring 2010 - 1 and the number of...

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Problem Set 2 ECON 414 Spring, 2010 Problem Set 2 is due in class on Tuesday, March 9. 1. Answer Problem 6 on page 144 in Harrington. 2. Answer Problem 7 on page 144 in Harrington. 3. Answer Problem 10 on page 145 in Harrington. 4. Answer Problem 11 on page 145 in Harrington. 5. Answer Problem 2 on page 175 in Harrington. 6. Answer Problem 5 on page 176 in Harrington. 7. Answer Problem 9 on page 176 in Harrington. 8. Answer Problem 7 on page 176 in Harrington. 9. A town has a bakery that sells bread and a cheese shop. It costs $1 to make a loaf of bread and $2 to make a pound of cheese. If the bakery’s price for a loaf of bread is p 1 and the cheese shop’s price for a pound of cheese is p 2 , then the number of loaves of bread sold q
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Unformatted text preview: 1 and the number of pounds of cheese sold q 2 are given by the following demand functions: q 1 = 14 – p 1- .5p 2 q 2 = 19 - .5p 1 – p 2 (a) Are bread and cheese complements or substitutes in this problem? Defend your answer. (b) Suppose the firms choose prices simultaneously. Derive each store’s best reply function. Graph the best reply functions and find the Nash equilibrium. (c) Now suppose the two stores collude and set prices so as to maximize their joint profits. Find the prices that maximize joint profits. (d) Are the prices in part (b) higher, lower, or equal to the prices in part (c)? What is the intuition behind this result?...
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