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

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

This preview shows page 1. Sign up to view the full content.

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
This is the end of the preview. Sign up to access the rest of the document.

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...
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online