ecn121bf09_ps1a - Fall 2009 Economics 121B: Industrial...

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1 Fall 2009 Joonsuk Lee Economics 121B: Industrial Organization Problem Set #1 Answer Keys Due: October 14, Wednesday, 9 a.m. Part I Short Answer 1 . What is the compensation principle? Compare it with the Pareto criterion. Answer : Compensation principle focuses on maximizing total surplus of a society. Thus, it does not matter how total surplus is divided among people. Only the amount of total surplus matters; however, Pareto efficiency considers each person’s (or party’s) welfare. Any Pareto improvement needs to make at least one person (or one party) better off without making anyone worse off. Pareto criterion is a stronger condition than compensation principle. 2 . In United States antitrust law, there are two approaches for identifying unreasonable restraints of trade, the per se rule and the rule of reason . Compare these approaches and give an example of applicable cases for each approach. Answer : The per se rule is essentially saying that just proving the existence of some specific actions is enough for conviction; no cost-benefit analysis are needed. Example: Price fixing, ADM case. The rule of reason needs to look to the “inherent effect” and “evident purpose (or intent)” to convict a firm. Example: Merger, XM-Sirius merger case. 3 . What is the definition of a Nash equilibrium ? Answer : A Nash equilibrium is a list of strategies such that each player’s strategy is best for her given those of the other players and this condition holds simultaneously for all players. Part II Derivation and Calculation (For this section, try to draw accompanying graphs illustrating your answers wherever possible.) 1 . A monopolist can produce at constant average and marginal cost of AC = MC = 5. There is no fixed cost. The firm faces a market demand curve given by Q = 53 – P . ( a
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This note was uploaded on 05/15/2010 for the course ECN 60112 taught by Professor Janinewilson during the Fall '10 term at UC Davis.

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ecn121bf09_ps1a - Fall 2009 Economics 121B: Industrial...

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