100b old midterm answers to free-response question 2_001

100b old midterm answers to free-response question 2_001 -...

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Econ 100B (Grossman)—Winter 2010 Answers (but not detailed solutions) to Spring 09, free-response question 2 The answers to parts a through g you can get simply by looking at the chart summarizing the results of the extended oligopoly models comparison example from the second set of lecture slides on oligopoly (from 2/11). The inverse demand given is p = 2 - Q and MC = 1 so a = 2 and c = 1 , implying a - c = 1 . Thus the answers are mostly just the coefficients from the relevant column in the chart 1. Oligopoly question (a) Cournot: Q = 2 / 3, p = 4 / 3 (b) Cournot: CS = 2 / 9, Π = 2 / 9, W = 4 / 9 (c) Cartel: Q = 1 / 2, p = 3 / 2 (d) Cartel: CS = 1 / 8, Π = 1 / 4, W = 3 / 8 (e) Competition: p = MC = 1, Q = 1, CS = 1 / 2, Π = 0, W = 1 / 2 (f) From competition to cartel: output decreases, price increases, profits up, CS and welfare down (g) Subsidy effectively reduces MC to zero. p = 2 / 3, Q = 4 / 3. Profits and CS increase, but benefits are canceled out by cost of subsidy (govt. expenditures). Subsidy causes
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Unformatted text preview: Q to overshoot efficient quantity of 1, it lands as far above efficient Q as it was below before. The result is symmetric and equal DWL. (h) On the other hand, the subsidy is exactly enough to land the monopolist to land at the efficient level of provision. Q = 1, p = 1. As with competition, CS = 1 / 2. The monopolists’ profits are zero per unit, but it gets the subsidy of 1 per unit, making for profits of 1. However, the subsidy costs 1 to provide, so W = 1 / 2+1-1 = 1 / 2. Because the subsidy encourages the under-producing cartel to produce the efficient amount, the DWL disappears. (i) See previous two answers. Subsidy would lower welfare in competitive case. Competitive industry already produces efficient amount. Subsidy would lead to inefficient over-production. (j) See above answers 1...
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