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Unformatted text preview: Econ 445
Fall 2010
Instructor: Sandra CAMPO—MANTON Midterm I: Sept 30th Important: Be clear and concise. Ten points will be reserved for clarity. If running out of time7 write the logic without the math.
Good luck. Problem 1: (20 points)
Deﬁne and /or explain the following: — How can the prisoner’s dilemma be applied to an economic problem.
— The Ray Average cost. Problem 2: (20 points) In 1990, Eli Lilly & Co. and GlaxoSmithKline decide to launch ELLIO drug, a drug for
diabetes patients. Eli Lilly & Co. launches the product 6 months in advance (in February 1990) with a
production cost of CE(qE) = 42g + 50, while GlaxoSmithKline’s production cost for the
same product is CG(qG) = 36g + 20. The product demand is p = 142 — 1.5q. (a) What is the model that best explains the competition here? Explain. (b) Find the optimal price and proﬁts at the equilibrium. Problem 3: (20 points) In 1995, Eli Lilly & Co. (Elli) and GlaxoSmithKline (GSK) gather their R&D and
start to produce together an improved drug named APPIC7 with a production cost
C(q) = 60q + 140. APPIC is released in 1991. The demand for the new drug is
p = 142 — 1.5q. They also (simultaneously) pull ELLIO off the market. (a) What is the model that best explains the competition here? Explain.
(b) Find the optimal price and proﬁts at the equilibrium. Problem 4 (30 points) In 2000, Eli and GSK decide to re—optimize their proﬁts. They have the option to both
reintroduce ELLIO and pull out APPIC (Plan A), or sticking to the new product (Plan
B). In plan B, the cost and demand functions remain the same than in problem 3. In
Plan A, the demand stays the same than in problem 2 but the cost function becomes C(q) = 36q + 20 for both ﬁrms. (a) Which model(s) best applies here? Explain.
(b) Find the optimal proﬁts at the equilibrium. Advice: If you run out of time, please describe the logic and your hints (if any) on the ﬁnal
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 Fall '08
 MCMANUS

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