# 101w06homework11-answer-sheet-x - Economics 101-300 Winter...

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Economics 101-300 Winter, 2006 Homework Problem Set #11 Problems: Price \$700 \$600 \$500 \$400 \$300 \$200 \$100 Demand 1,000 2,000 3,000 4,000 5,000 6,000 7,000 1) Dr. Dre and Eminem have both opened factories to produce DJ mixing stations. Their firms, which are the only two that produce these mixing stations and which are incorporated in Kuwait, face the demand schedule in the table above. One night, Dr. Dre and Eminem are having dinner at the Rattlesnake Club and they form a cartel where they both supply ½ of the market. If the marginal cost of production is constant at \$105 per mixing station, how much will Eminem’s factory produce in equilibrium? Price \$700 \$600 \$500 \$400 \$300 \$200 \$100 Demand 1,000 2,000 3,000 4,000 5,000 6,000 7,000 Revenue \$700,00 0 \$1,200,00 0 \$1,500,00 0 \$1,600,00 0 \$1,500,00 0 \$1,200,00 0 \$700,000 Marginal Revenue \$700 \$500 \$300 \$100 -\$100 -\$300 -\$500 MR>=MC at a total of 3,000 mixing stations (remember that if we put up a completely continuous schedule, we would move to MR = MC, remember also that MR = Rev/ Q we change quantity by 1,000 in the graph). Eminem’s firm produces 1,500. 2) Here is an example of how a topic addressed in the previous question might be presented as a multiple choice problem: Even though Dr. Dre and Eminem are the only two producers in the market for DJ mixing stations, the market is highly contestable. Therefore, Dr. Dre and Eminem act as though they are producing in a competitive market when making decisions regarding production levels. If, once again, their firms face the demand schedule in the table above and marginal costs of \$105, how many more units will be produced under the assumption of contestability rather than under the assumption that the two firms act as a cartel? a) 4,000 b) 7,000 c) 5,000 d) 3,000 e) 1,000 Answer: d-3,000. If Dr. Dre and Eminem act as though they are producing in a competitive market, they will produce at a level where P>=MC. In this case, they will

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produce 6 DJ mixing stations. If Dr. Dre and Eminem act as a monopolistic cartel, they will only produce 3,000 mixing stations. Therefore, when the market is competitive, 3,000 more mixing stations are produced. 3) Target and Circuit City initially agree that each will sell a certain quantity of MP3 players. Later, each must decide (simultaneously) whether to sell the agreed upon quantity (Qagree) or increase the quantity sold (Qincrease). The profits to both firms (Target, Circuit City) are summarized in the payoff matrix below. Which of the following statements is TRUE? Circuit City Qagree Qincrease Target Qagree 10, 40 15, 50 Qincrease 15, 30 10, 35
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