Problem Set 6

Problem Set 6 - than the oligopoly prices? If so, explain...

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Econ 100A – Microeconomics Professor Reynolds Department of Economics University of California, Berkeley Problem Set 6 Due 8:10 am April 18 1. Two firms compete for consumers who have the aggregate demand curve x=100-2p. Both firms have constant marginal cost, with MC 1 =1 and the other firm has MC 2 equal to some constant c>1. a. Using Bertrand price competition, illustrate both firms’ best response functions & indicate what the outcome is for each firms’ production & profit. b. Using Cournot quantity competition, illustrate both firms’ best response functions. c. Suppose firm 2 is the “smarter” firm and is able to tell what firm 1’s best response function is. Using Stackleberg competition, what is the highest value of c such that firm two has more profits than firm one? 2. Exercise 26.4 all parts from A; i and p* j ) g. Are there any values of for which the monopolist prices for both goods are smaller
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Unformatted text preview: than the oligopoly prices? If so, explain how this can be profitable for the monopolist. h. In terms of , what are the socially optimal prices? 3. I am going on vacation in the summer and I would like to hire a student to run my cookie baking business. Profits are based on the student’s effort e and equal to 2e + . The student’s cost of effort is e 2 . If I do not hire the student, the student will work at as dorm clerk, exert zero effort, and make $3. Help me determine the salary scheme: s=a+b . a. What is the student’s participation constraint? b. What is the incentive constraint? c. What is my optimization problem? d. What will I pay the student & how much effort will be exerted? e. What will be my profits? Do you think I should skip my vacation to stay home & monitor the student? (My vacation would provide me with $7 net utility.) f. What is the socially efficient level of effort?...
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This note was uploaded on 09/11/2011 for the course ECON 100A taught by Professor Woroch during the Spring '08 term at Berkeley.

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