Assignment
1. Assume that a monopolist operates in a market where demand is Q=100-P, marginal cost MC = average cost AC = $20. Further, assume that if the monopolist were to be broken up, MC under competition would remain $20. The marginal revenue of the monopolist MR = 100-2Q. Assume that the monopolist is able to maintain its monopoly by lobbying the government, paying its lobbyists $10 per unit of output to persuade legislators to protect the monopolist from competition.
a. Calculate the prices and quantities under both monopoly and competition
b. Calculate total economic surplus under both monopoly and competition. The difference between the two is the social cost of monopoly: what is this difference?
c. The social cost of monopoly can be broken into two types of cost: the resource cost of rent seeking and the usual deadweight loss of output restriction. What are their respective magnitudes?
2. Consider the following game between two firms, Acme and Globex shows their profits in millions of dollars for various production levels of a good:
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GLOBEX
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ACME
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High Production
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Low Production
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High Production
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$600,$600
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$1200, $300
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Low Production
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$300, $1200
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$900, $900
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a. What is the Nash Equilibrium of this game?
b. Would it be possible for Acme and Globex to collude and keep production artificially low? Explain your answer in both words and derive mathematically an economic justification for your answer.
3. There are two firms, Upstart Inc and Established Corp. Upstart is thinking about entering a new market where Established Corp already operates. Upstart must choose either "In" and enter the market, or "Out" and remain outside the market. If Upstart chooses out and does not enter, the game ends. Upstart receives a payoff of 1 and Established receives a payoff of 2. However, if Upstart chooses "In" and enters the market, Established Corp then must make one of two choices. Established can either "Accede" and accept that Upstart has entered its market, or it can "Fight" and price very aggressively to punish Upstart for entering. If Established Corp plays"Accede", Upstart receives a payoff of 2 and Established Corp receives a payoff of 1. If Established Corp plays "Fight," then both Upstart and Established receive payoffs of 0. The extensive form of the game is:
a. Determine the Nash equilibria of this game
b. If there is more than one Nash equilibrium, is one a better solution than the other? Why or why not?
4. In 1971, the federal government prohibited the advertising of cigarettes on television and radio. Can you explain why this ban on advertising may have increased the profits of cigarette manufactures? Hint: Use the Advertising Game discusses
5. The inverse market demand for mineral water is P = 200-10Q, where Q is the total market output and P is the market price. Two firms, A and B, have complete control over the supply of mineral water and both have zero costs.
a. Operating independently, how would each firm determine the quantity to be produced? Will this quantity maximize the profits of both firms?
6. Go to the following link and watch the following clip from the television program The Big Bang Theory: https://www.youtube.com/watch?v=Kov2G0GouBw
Draw the extensive form of the game: "Rock, Paper, Scissors, Lizard, Spock."