1. Monopoly:
A monopolist can sell in two markets. In the U.S.A. it has to meet demand given by: QUS = 6200 - 100PUS while in Europe it faces demand given by QEU = 7800 - 200EU
a) What is the practice of charging different prices in different markets called? Typically why is it not possible to price discriminate between markets?
b) It costs the firm $17,150 even if it produces nothing, and $20 for every unit it above that. Find the price and quantity sold in each market. What is the firm's profit?
c) Now the firm has access to a new technology with no fixed costs but slightly increasing marginal cost: MC = .05Q. Find the price and quantity sold in each market. How much will the firm produce with each technology? What is the firm's profit?
2. Duopoly:
Two identical firms have MC = $3 (no fixed costs) and face a market demand of QD = 9 - P.
a) If the firms compete on the basis of (continuous) price, which duopoly model explains
what happens? What kind of a game is this? If the firms compete a fixed number of times, what is the Nash Equilibrium? Why does this happen?
b) Under what circumstances will the firms cooperate? Calculate the temptation payoff and the value of δ*.
c) If the firms compete on the basis of (continuous) quantity, with one firm being the leader and the other the follower, which duopoly model explains what happens? What are the firms' reaction curves? Find the equilibrium price, and output and profit of the leader and the follower.
3. Insurance :
Fanny the farmer plants a crop that will yield $160,000 income this year. However, there is a 10% chance that a hurricane will occur and the crop will be ruined. If the crop is ruined, Fanny's income will be $0. Her von Neumann-Morgenstern utility index is:
U=Y12
a) What is the maximum amount Fanny will pay to fully insure against the hurricane?
b) The Acme Insurance Company is risk neutral and offers insurance at an actuarially fair price. However, AIC believes that farmers who have insurance often plant in fields that are more prone to hurricanes, so that the probability of a fully insured farmer having a total crop loss rises to 20%. At what price will AIC offer this coverage? How much insurance will Fanny purchase at this price? Explain your answer carefully.
c) Is the firm in long run equilibrium at this price? Explain what is happening here.
4. Externality:
"If there is an externality, there is a unique efficient level of production, but there is no unique efficient price."
a) What is "efficiency" in this context and what condition holds when we reach this point? Is this statement correct? Explain.
b) Support your answer by comparing 2 policies to curb fuel pollution:
assume QS = 10P and QD = 100 - 10P and that fuel causes pollution costing $2.50/gallon. Calculate price, quantity, and social surplus for the initial state and each policy.
5. Unrelated questions:
Explain your answers precisely, briefly defining the chief concept being explored.
_(3+5) × 3 - 1_
a) Under what circumstances can an industry with a regular U-shaped AC curve still end up being a monopoly? What will ensure that the lowest price is being charged?
b) What is an externality? What are public goods? How do they interact in the "Tragedyof the Commons" scenario?.
c) What is a Prisoner's Dilemma? What the set of factor's cause to arise? Why is it such a dilemma?