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Unformatted text preview: Problem Set 4 (Due on 29th Oct) ECON105 Industrial Organization and Firm Strategy Professor Michael Noel University of California San Diego 1. Claudia operates a fruit stand and sells bananas and coconuts. Marginal cost is zero as Claudia just picks up the fruit as it falls from the trees onto her land. There are two consumers, Bavanee and Cecilia. Cecilia values a banana at $4 and a coconut at $9. For Bavanee, her valuations are $6 and $3 respectively. Show that Cecilia could make more money by bundling one banana and one coconut into a fruit basket and selling the basket rather than selling the fruits separately. 2. Two firms compete Cournot. The market demand curve is Q = 16/p and each firm faces a cost function C(qi) = cqi. a. Find the equilibrium firm quantities, industry quantity, price and firm profits. b. Verify that the Lerner Condition (for Cournot competition) holds. c. Optional and not counted toward the grade: repeat a. and b. using the market demand curve Q = 1 p and a cost function for each firm of C(qi)=qi/2. 3. There are 9 firms in an industry. The demand curve is given by Q = 55 - p....
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- Spring '10