Assignment
Instructions: Answer each of the following questions. In answering the questions, keep in mind that this is a graduate level understanding of the material. Every answershould include a brief discussion of how you reach the conclusions you did.
1) A pharmaceutical company has estimated the demand function for a drug for which it has a patent to be:
Q = 75000 - 100 P + .5 M
a) If M is 50,000, what is the demand function?
b) If M is 50,000, what is the inverse demand function?
c) If M is 50,000, what is MR?
d)If M is 50,000 and MC = 50, what is the profit maximizing level of output and price?
When the patent expires, it is expected that a large number of other firms will enter the market by offering generic alternatives. This transforms the market from a monopoly to perfect competition.
e) If M is 50,000 and MC = 50, what is the profit maximizing level of output and price?
f) In the short run, are consumers who take this drug better or worse off after the patent expires?
g) Would your answer to f) change if you take into account long runincentivesto develop new drugs?
2) Product standards: Firms often find it advantageous if an industry adopts a single standard, but often will prefer that an industry adopt one standard vs. another standard (e.g., the firm may own a patent that applies to one standard but not the other). Suppose there are two firms and two standards. Suppose Firm 1 most prefers that both firms adopt Standard M, second most prefers that both firms adopt Standard W, third prefers that it adopt Standard M while the other firm adopts Standard W and least prefers that it adopt Standard W while the other firm adopts Standard M Firm 2 most prefers that Standard W be adopted by both firms, second most prefers that both firms adopt Standard M, third prefers that it adopt W while the other firm adopts M and least prefers that it adopt M while the other adopts W. The normal form of the game is given below.
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Firm 1
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Standard W
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Standard M
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Firm 2
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Standard W
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400
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300
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200
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200
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Standard M
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100
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100
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300
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400
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a) Explain why there are two pure Nash equilibriums.
b) Does this game have a first mover advantage? Explain. (Hint: Use the extensive form of the game.)
3) Discuss the market structure faced by NMSU Bookstore (which is operated by Barnes and Noble). Based on the hypothesized market structure, what management actiondo you recommend to the Bookstore? Be sure that the management actions are tailored to the market structure and not generic actions applicable regardless of the market structure.
4) Suppose an industry consists of two identical firms (that is, the industry is a duopoly). The two firms take the others production (Q) as given.
a) Suppose you know the following, find the best response function:
MR1 = 10000 - Q1 - .5Q2, MC1 = 1000
MR2 = 10000 - .5Q1 - Q2, MC2 = 1000
b) Using the best response function found above, find Q1 and Q2.
5) You are in a meeting about the price strategy to adopt for a product your firm is about to introduce into a new market. Jack says, "We should use price skimming." Jane says, "We should use penetration pricing."
a) What assumption is Jack making about the dynamics of price elasticity?
b) What assumption is Jane making about the dynamics of price elasticity?
c) How might you decide between the two alternatives?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.