{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

04 final 12

# 04 final 12 - MRA = 6.5 — 0.1QA Setting MRA = MCA = 3 for...

This preview shows page 1. Sign up to view the full content.

This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: MRA = 6.5 — 0.1QA Setting MRA = MCA = 3 for firm A’s proﬁt maximiution yields 6.5 — 0.1QA = 3 or QA = 35 Substituting the value of QA into reaction function of ﬁrm B, Q; = 35 — 0.5QA= 17.5 Substituting the value of Q (=QA + Q3) into demand equation, P =10 - 0.1(35 + 17.5) = \$ 4.75 The required increase in ﬁrm B’s FC, F5, to ensure that it would choose not to enter is given by Rg—VCE—(FCB+FB)<0 or (4.75 ~ 3)(17.5) — 15 - FE < 0 or F9 > \$ 15.625 Question 15: Consider the following market for inventions. There are 1101 inventors, each of which owns the rights to one invention. The value of the inventions, if undertaken by ﬁrms, is uniformly distributed between -100 and 1000. That is, one invention would result in net income of -100 dollars if undertaken by a ﬁrm; another invention would result in net income of -99 dollars if undertaken by a ﬁrm; all the way up to net income of 1000 dollars. Each inventor knows the value of her own invention. Each inventor could develop her invention herself, but doing so would involve additional costs of 300 dollars, since the inventor is not really set up for production. There is an unlimited number of ﬁrms available to buy a project at a price equal to the value (the net income) expected from the invention. (3 points) a. If ﬁrms can identify the value of each invention, what will be the total quantity of inventions sold? All inventions from 0 to 1000: i.e. 1000 (or 1001, counting the 0'II value inventions) inventions. (6 points) b. If ﬁrms cannot identify the quality of the inventions before buying them, but know the distribution of the value of inventions, then: i. What price are ﬁrms willing to pay for inventions? ii. Which inventions will be sold and developed by ﬁrms? iii. Which inventions will be developed by the inventors themselves? The price P for inventions will attract supply from all inventions with value v between v=-100andv=P+300. The average value of these inventions = ( -100 + P + 300 ) /2. This average value must equal P in equilibrium: P = ( -100 + P + 300 ) [2 which yields (i) P = 200. So (ii) all projects with value [-100, 500] are sold ; (iii) all better projects (500, 1000] are developed by the inventors. 13 ...
View Full Document

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern