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# Sarah Hamersma ECO 3101 Homework # 6 -Imperfect Competition &amp; Asymmetric Information due Monday, Dec. 3, in class 1. In this problem we consider...

Only answer question number 3 (a, b, c, d and e).

Prof. Sarah Hamersma ECO 3101 Homework # 6 Imperfect Competition & Asymmetric Information due Monday, Dec. 3, in class 1. In this problem we consider the differences between the competitive, monopoly, and Cournot equilibria under the same cost conditions. Demand is: Q = 10,000 – 1000 P and marginal cost (and average cost) is constant at MC = \$6. a. Graph the demand, marginal revenue, and marginal cost curves. b. Calculate the price and quantity associated with the perfectly competitive outcome. Label this point on your graph. Also compute consumer surplus, deadweight loss, and industry profits. c. Calculate the price and quantity associated with a monopoly outcome. Label this point on your graph. Also compute consumer surplus, deadweight loss, and industry profits. d. Consider the possibility that there are only two firms in the industry (call them A and B) and that they compete based on simultaneously determining quantity. Calculate the equilibrium price and quantity in this case and label it on your graph. Also compute consumer surplus, deadweight loss, and industry profits. 2. In a Bertrand equilibrium without product differentiation, how must P A and P B be related? What are the key assumptions that prevent another equilibrium from being possible? 3. Rooster4U and Clucks are huge fast food chains that sell chicken lunch specials. Although both lunches include 2 pieces of chicken, Chicken4U includes waffle fries and a lemonade with its chicken special, while Clucks includes mashed potatoes (with gravy) and a soda. To keep this problem simple, assume that MC = 0. The national demand for lunch specials at Rooster4U is: Q R = 5000 – 1000P R + 300P C and the national demand for lunch specials at Clucks is: Q C = 3000 – 1500P C + 225P R
a. Calculate the Bertrand best response function for Rooster4U – this should be an expression for P R in terms of P C (Hint: solve first for the profit-maximizing Q R in terms of P C and then substitute that expression in for Q R in the demand curve to get an equation with only P R and P C – then solve for P R .) b. Calculate the Bertrand best response function for Clucks (an expression for P C in terms of P R ). c. What price with Rooster4U charge and what price will Clucks charge? d. How many meals will each restaurant sell? e. Based on the information conveyed by the demand curve expressions, how would you explain the price difference between the two meals? 4. Consider the last part of problem 1, in which two firms engage in Cournot competition. Suppose that firm B is now allowed to make its decision first, while firm A will make its decision after it observes firm B’s choice. a. Find the choice of quantity output for both firm A and firm B. b. Solve for the total industry output and the price. c. Discuss how this equilibrium compares to the last part of problem 1, in which the quantity decision was made simultaneously. Is this new outcome more efficient (i.e. less dead weight loss)? Which firm has the advantage when the decision is not simultaneous? 5. Explain the difference between adverse selection and moral hazard. Think of an example of each one ( not one from your notes) and describe it.

3.
a) We have QR = 5000 -1000PR +300PC
and QC = 3000 -1500PC +225PR. In Bertrand completion, the firms compete in prices.
For Rooster4u, the profit function is given by,
πR =PR*QR = 5000PR...

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