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Principles of Microeconomics - Econ 2003-101 Homework 3 - Due on May 3, 2010 1. In the table below are cost and demand data for a pure monopolist....

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Principles of Microeconomics - Econ 2003-101 Homework 3 – Due on May 3, 2010 1. In the table below are cost and demand data for a pure monopolist. Quantity demanded Price Marginal revenue Average cost Marginal cost 0 $105.00 1 96.00 $ 96.00 $144.00 $144.00 2 87.00 78.00 90.00 36.00 3 78.00 60.00 70.34 30.00 4 69.00 42.00 63.00 42.00 5 60.00 24.00 60.00 48.00 6 51.00 6.00 58.50 51.00 7 42.00 –12.00 57.86 54.00 8 33.00 –30.00 57.50 55.50 9 24.00 –48.00 57.33 56.00 (a) What is the level of price, output, and amount of profit for an unregulated monopolist? (b) Using the data in the table, what are the price, output, and profit for a regulated monopolist that sets price equal to marginal cost compared with an unregulated monopolist? (c) Using the data in the table, what are the price, output, and profit for a regulated monopolist that charges a “fair-return” price (average cost pricing) compared with an unregulated monopolist? (d) Analyze the effect of regulation on the allocation of resources. Which situation is most efficient? Which situation is most likely to be chosen by government? Why? 2. The market shares of firms in three different industries are listed in the table below. Use this information to calculate the Herfindahl index for each industry. Firms Industry 1 Industry 2 Industry 3 1 65 70 35 2 15 15 35 3 10 10 30 4 5 5 5 5 Herfindahl Index _____ _____ _____ (a) Which industry has the greatest market power? The least? (b) Based on your findings, is the number of firms in the industry a good predictor of the competitiveness of an industry? Why or why not?
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3. Consider the following payoff matrix in which the numbers indicate the profit in millions of dollars for a duopoly based either on a high-price or a low-price strategy. Determine the Nash equilibrium. 4. A perfectly competitive firm in the factor and product markets sells its output for $1 and pays factors P L = $9 and P c = $12. What is the profit-maximizing combination of labor ( L ) and capital ( C ) for the firm? 5. The table below summarizes the marginal product data for labor in producing personal computers. Assume the other quantities employed by the firm remain constant. (a) Compute the MP L , TR, and MRP. (b) What type of market is this for personal computers? Firm A High-price Low-price High-price A = $500 B = $500 A = $650 B = $300 Firm B Low-price A = $300 B = $650 A = $400 B = $400 Q L MP L Q C MP C 1 28 1 18 2 24 2 15 3 20 3 12 4 16 4 9 5 9 5 6 6 4 6 3 7 2 7 2 L TP L MP L Price TR MRP 0 0 $1000 _____ 1 10 _____ 1000 _____ _____ 2 18 _____ 900 _____ _____ 3 24 _____ 800 _____ _____ 4 28 _____ 700 _____ _____ 5 30 _____ 600 _____ _____ 3. Consider the following payoff matrix in which the numbers indicate the profit in millions of dollars for a duopoly based either on a high-price or a low-price strategy. Determine the Nash equilibrium. 4. A perfectly competitive firm in the factor and product markets sells its output for $1 and pays factors P L = $9 and P c = $12. What is the profit-maximizing combination of labor ( L ) and capital ( C ) for the firm? 5. The table below summarizes the marginal product data for labor in producing personal computers. Assume the other quantities employed by the firm remain constant. (a) Compute the MP L , TR, and MRP. (b) What type of market is this for personal computers? Firm A High-price Low-price High-price A = $500 B = $500 A = $650 B = $300 Firm B Low-price A = $300 B = $650 A = $400 B = $400 Q L MP L Q C MP C 1 28 1 18 2 24 2 15 3 20 3 12 4 16 4 9 5 9 5 6 6 4 6 3 7 2 7 2 L TP L MP L Price TR MRP 0 0 $1000 _____ 1 10 _____ 1000 _____ _____ 2 18 _____ 900 _____ _____ 3 24 _____ 800 _____ _____ 4 28 _____ 700 _____ _____ 5 30 _____ 600 _____ _____
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This question was asked on May 01, 2010.

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