1. Suppose that firm A is a monopoly that has marginal cost equal to $50. Also, assume that the demand for the monopolistic good has constant elasticity of -3.0. By how much should the price increase if there's a shock to the firm's cost that makes the marginal cost increase by 20 percent?
2. A drug company has a monopoly on a new patented medicine. The product can be made in either of two plants. The costs of production for the two plants are MC1 = 20 + 2Q1 , and MC2 = 10 + 5Q2 . The firm's estimate of the demand for the product is P = 20 - 3(Q1 + Q2). How much should the firm plan to produce in each plant, and at what price should it plan to sell the product?
3. Prove and explain in your own words the Folk theorem.
4. Explain in your own words the Bertrand Paradox and one of the possible approached to solving it.
5. Suppose that two firms competing in a Bertrand duopoly have marginal cost $4. Suppose further that ql and q2 are lower than 1/8. How much both firms should charge under proportional rationing?
6. Explain why asymmetric information is a deterrent of collusion in a dupolistic competition.
7. Explain why the kinked demand approach was not accepted for solving a dynamic dupolistic competition problem and what was proposed as an alternative for solving such problem? Explain in detail what this alternative approach is, what is the problem it tries to solve, what are the variables involved, and what is the mechanism (technicalities) used for solving.
8. Consider a market for a homogeneous product with demand given by Q = 30 - P/2. There are two firms, each with constant marginal cost equal to 20.
a) Determine output and price under a Cournot equilibrium.
b) Compute the efficiency loss as a percentage of the efficiency loss under monopoly.