Q1. Currently, there is an incumbent monopoly in a market. A potential entrant may enter. The incumbent can spend X dollars lobbying to require all new firms that enter the market to use a pollution-abatement device that costs Y dollars to install. If lobbying occurs, the pollution-abatement device will be required. Draw the game tree describing this situation. Under what conditions will the monopoly lobby?
Q2. Suppose that the supply curve of healthcare services is perfectly inelastic (i.e., vertical). Analyze the impact of an increase in consumer income on the market price and quantity of the services. Now, suppose that the demand for healthcare services is
perfectly inelastic (i.e., vertical), while the supply curve is upward sloping. Analyze the impact.