1. A firm in a competitive market invents a new method of production that lowers its marginal costs. What happens to its output? What happens to the price it charges?
a. The firm has an employee who threatens to tell all other firms in the industry about how to implement this new technique. Will it be possible to bribe the employee not to do this? Explain why or why not.
b. Why should this employee probably choose to tell only some of the other firms rather than all of them?
c. What factors will determine the best number of firms to sell the secret to?
2. A perfectly competitive firm faces a market price of $10 for its output X. It owns two plants, a and b, whose total costs are TCa= 10+ 2X+ .25X (to the 2nd power) TCb= 15 + .4X+ .1X (to the 2nd power)
3. A monopolist has two types of customers. There are 100 of Type A, who will each pay up to $10 for a single unit of the good, and 50 of Type B, who will each pay up to $8. Neither is willing to purchase additional units at any price. If it must charge a uniform price, find that price.
a. Assume that spending $80 on advertising will attract 100 more Type B customers. Should the monopolist advertise? If so, what will happen to price?