QUESTION
| Question 1 |
| 1.1. Filled out the whole table with the correct numbers. |
| 1.2. Correctly identifies the firm type and gives an example of such a firm. |
| 1.3. Can successfully find the profit maximising price and output. |
| 1.4-5 Correctly labelled diagram showing correct values |
| Question 2 |
| 2. Correctly identifies the Nash equilibrium and can explain why it is an equilibrium. |
| Question 3 |
| 3. Correctly calculates cross-elasticity & select the correct answer |
SOLUTION
Solution 1:
1.1)
1.2) Firm X depicts the case of imperfect competitive firm having constant cost because the marginal revenue curve is downward sloping which indicates that the firm is a price maker.
Example of such a firm is telecom industry.
1.3) Profit maximizing price : $5
Quantity : 200 units
1.4) In the figure below, initial price is Pe at which the firm earns economic profits equal to the rectangular area between Pe and the highlighted line touching the ATC curve. These excess profits will attract the new firms to enter in the market thereby shifting the supply curve to the right. The new equilibrium price in the market would be PLR with corresponding quantity Q LR. At this price the firm would earn just normal profits with corresponding quantity sold of qLR (which is lower than the initial quantity supplied by the firm)
Panel a MARKET Panel b FIRM
1.5)
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LAC
LMC
Cost,
Revenue,P
PL
MR AR
QL Quantity
The monopolistic firm is in equilibrium where MR=MC. At this point the corresponding price is PL (computed by drawing a horizontal line from AR corresponding to equilibrium quantity QL.
At PL , the cost of production is higher than the price . The rectangle highlighted in the figure above depicts the quantum of loss occurring to the monopolistic firm.
SOLUTION 2:
| Game 1: |
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Company A |
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Comply |
Cheat |
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Company B |
Comply |
B=20, A=20 |
B= -20, A=50 |
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Cheat |
B=50, A= -20 |
B=0, A=0 |
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To find NASH EQUILIBRIUM , we examine each action profile in return:
(comply, comply) : Company B can increase its payoff from 20 to 50 by choosing to cheat rather than comply. Thus, this is not a Nash Equilibrium
(comply, cheat) : Company A can increase its payoff from -20 to 0 by choosing to cheat rather than comply . Thus, this is not a Nash Equilibrium
(cheat, comply) : Company B can increase its payoff from -20 to 0 by choosing to cheat rather than comply. Thus, this is not a Nash Equilibrium.
(cheat, cheat) : Neither Company can increase its payoff by choosing an action different from their current one. Thus this action profile is a Nash Equilibrium.
SOLUTION 3:
I) CROSS ELASTICITY OF DEMAND=
=
=
= 4
2) Coke and pizza are substitutes as the cross elasticity between them is positive. When price of coke increased from $2 to 2.5 ; customers shifted their preference from coke to pizza and started demanding more of pizza.
KG54
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