examples3 - 1. Consider the market for biometric devices in...

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1. Consider the market for biometric devices in the island of Utopia. In Utopia, only 20 entrepreneurs have the technical knowledge to start a company manufacturing biometric devices. Ten of these entrepreneurs are currently CMU professors making $20,000 a year, while 10 others are software architects earning a salary of $10,000 a year. Land in Utopia is scarce and hence the government of Utopia wants to restrict the number of firms to a manageable size. They do so by selling a limited number of licenses to entrepreneurs to start companies producing biometric devices. If the firms do end up manufacturing biometric devices, you can assume that they are going to be identical, all with the same cost function of c(y) =2q 2 +120q+L (where L is the yearly fixed license fee), and all behaving in the market like profit maximizing firms . The entrepreneurs’ salary comes from their companies’ short-term profits. Since firms are identical and all produce the same good, you can assume that they face identical individual demand curves. Assume that the yearly industry demand curve is given by Q=N(2800 – 5p), where N is the number firms. (a) What are the short run (i.e., one year) equilibrium price and quantities produced by each firm? Answer : Individual firm demand is q=2800-5p; or p=560-q/5. TR = q(560-q/5); MR = 560-2q/5; MC = 4q+120; q*=100;p*=540; revenues = 54,000; variable costs = 32,000; profit excluding L: 22,000. (b) If the government sells the license for $1,000, how many companies would you expect to be started? Answer: With a fee of 1,000 also professors find it optimal to start companies – so we will have 20 companies. (c) If the government sells the license for $4,000, how many companies would you expect to be formed and who will lead them? Answer: With a fee of 4,000 there will only by 10 companies led by soft eng. 2. Assume there is a monopoly hard disk dealer in your town, where 100 customers live uniformly distributed along a line from 0 to 1 mile. Further assume that the monopoly dealer is located in the middle of the line (i.e. at 0.5 miles). Assume that the travel costs for customers are $4 per mile and that each customer will buy one hard disk if its cost is less than or equal to $4. (a) Write a formula for the demand function of the dealer.
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examples3 - 1. Consider the market for biometric devices in...

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