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c295_assign2_2009_sol

# c295_assign2_2009_sol - DATE UBC Sauder School of Business...

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1 DATE: ______________ UBC Sauder School of Business Commerce 295 / FRE 295 Fall 2009 Assignment 2 NAME: _______________________________________ STUDENT NUMBER: _______________________________________ SECTION NUMBER: _______________________________________ PROFESSOR: _______________________________________ MARKS: Points Multiple Choice (graded by Vista; use My Grades link) ______ /20 Longer Questions 1 / 10 2 /10 3 ______ /10 4 /10 5 /10 6 /10 7 /10 8 /10 TOTAL _________ / 100

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2 Section I: 10 Multiple Choice Questions (2 points each; 20 points total) For each multiple choice question select only one response. 1. Suppose that Joyce, Calvin and Melody go to a restaurant that offers soup and sandwiches. Their reservation prices (showing willingness to pay) for soup and sandwiches are given by the following table. Each item costs the restaurant \$3 to provide. The restaurant is considering what type of pricing policy to use. Soup Sandwich Joyce 8 4 Calvin 6 6 Melody 4 8 a) Mixed bundling generates higher profit than pure bundling in this case. b) Perfect (1st degree) price discrimination is better than pure bundling in this case. c) Charging a \$4 entry fee to enter the restaurant followed by separate stand-alone prices for each item would maximize profit in this case. d) All of the above. 2. Relative to the Nash equilibrium in the Cournot model, the Nash equilibrium in the Bertrand model with homogenous products: 3. Firms 1 and 2 produce identical products, q1 and q2. Industry (inverse) demand is given by P = 120 Q, where Q = q1 + q2. Firm 1 has a constant marginal and average cost of \$20. Firm 2 has a constant marginal and average cost of \$40. Assume that the Cournot model applies to this industry. 4. What happens to an incumbent firm's demand curve in monopolistic competition as new firms enter?
3 5. Consider two firms with the same cost function producing a homogeneous product. Suppose demand is linear and marginal cost is constant. When comparing the Nash equilibrium in the Cournot model to the Nash equilibrium in the Stackelberg model: a) the Cournot equilibrium will have greater aggregate quantity than the Stackelberg equilibrium b) the Stackelberg equilibrium will have greater aggregate quantity than the Cournot equilibrium c) consumer welfare will be greater in the Cournot equilibrium d) choices a and c

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