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microeconomics

Microeconomics 4th Edition David Besanko, Ronald Braeutigam - Solutions

13.26. Two firms, Alpha and Bravo, compete in the European chewing gum industry. The products of the two firms are differentiated, and each month the two firms set their prices. The demand functions facing each firm are:where the subscript A denotes the firm Alpha and the subscript B denotes the
13.25. Again consider the Coke and Pepsi example discussed in the chapter. Use graphs of reaction functions to illustrate what would happen to equilibrium prices if:a) Coca-Cola’s marginal cost increased.b) For any pair of prices for Coke and Pepsi, Pepsi’s demand went up.
13.24. Consider the Coke and Pepsi example discussed in the chapter.a) Explain why each firm’s reaction function slopes upward. That is, why does Coke’s profit-maximizing price go up the higher is Pepsi’s price? Why does Pepsi’s profit-maximizing price go up the higher Coke’s price is?b)
13.23. The market demand curve in the nickel industry in Australia is given by Qd ! 400 " 8P. The industry is dominated by a large firm with a constant marginal cost of $10 per unit. There also exists a competitive fringe of 100 firms, each of which has a marginal cost given by MC ! 10 # 50q, where
13.22. Britney produces pop music albums with the total cost function TC(Q) ! 8Q. Market demand for pop music albums is P ! 56 " Q. Suppose there is a competitive fringe of price-taking pop music artists, with total supply function Qfringe ! 2P " y, where y $ 0 is some?
13.21. Apple’s iPod has been the portable MP3-player of choice among many gadget enthusiasts. Suppose that Apple has a constant marginal cost of 4 and that market demand is given by Q ! 200 " 2P.a) If Apple is a monopolist, find its optimal price and output. What are its profits?b) Now suppose
13.20. Consider the same setting as in the previous problem, but now suppose that the industry consists of a dominant firm, Braeutigam Cobalt (BC), which has a constant marginal cost equal to $40 per unit. There are nine other fringe producers, each of whom has a marginal cost curve MC ! 40 # 10q,
13.19. Suppose that the market demand for cobalt is given by Q ! 200 " P. Suppose that the industry consists of 10 firms, each with a marginal cost of $40 per unit.What is the Cournot equilibrium quantity for each firm?What is the equilibrium market price?
13.18. Consider a market in which we have two firms, one of which will act as the Stackelberg leader and the other as the follower. As we know, this means that each firm will choose a quantity, X (for the leader) and Y (for the follower). Imagine that you have determined the Stackelberg equilibrium
13.17. Consider a market in which the market demand curve is given by P ! 18 " X " Y, where X is Firm 1’s output, and Y is Firm 2’s output. Firm 1 has a marginal cost of 3, while Firm 2 has a marginal cost of 6.a) Find the Cournot equilibrium outputs in this market.How much profit does each
13.16. The market demand curve in a commodity chemical industry is given by Q ! 600 " 3P, where Q is the quantity demanded per month and P is the market price in dollars. Firms in this industry supply quantities every month, and the resulting market price occurs at the point at which the quantity
13.15. Consider an oligopoly in which firms choose quantities. The inverse market demand curve is given by P ! 280 " 2(X # Y ), where X is the quantity of Firm 1, and Y is the quantity of Firm 2. Each firm has a marginal cost equal to 40.a) What is the Cournot equilibrium outputs for each firm?
13.14. An industry consists of two Cournot firms selling a homogeneous product with a market demand curve given by P ! 100 " Q1 " Q2. Each firm has a marginal cost of $10 per unit.a) Find the Cournot equilibrium quantities and price.b) Find the quantities and price that would prevail if the firms
13.13. Suppose that firms in a two-firm industry choose quantities every month, and each month the firms sell at the market-clearing price determined by the quantities they choose. Each firm has a constant marginal cost, and the market demand curve is linear of the form P ! a "bQ, where Q is total
13.12. Besanko, Inc., is one of two Cournot dupolists in the market for gizmos. It and its main competitor Schmedders Ltd. face a downward-sloping market demand curve. Each firm has an identical marginal cost that is independent of output. Please indicate how the following will affect Besanko’s
13.11. An industry is known to face market price elasticity of demand (Assume this elasticity as constant as the industry moves along its demand curve.)The marginal cost of each firm in this industry is $10 per unit, and there are five firms in the industry. What would the Lerner Index be at the
13.10. A homogeneous products oligopoly consists of four firms, each of which has a constant marginal cost MC ! 5. The market demand curve is given by P ! 15 " Q.a) What are the Cournot equilibrium quantities and price? Assuming that each firm has zero fixed costs, what is the profit earned by each
13.9. Suppose that demand for cruise ship vacations is given by P ! 1200 " 5Q, where Q is the total number of passengers when the market price is P.a) The market initially consists of only three sellers, Alpha Travel, Beta Worldwide, and Chi Cruiseline. Each seller has the same marginal cost of
13.8. In a homogeneous products duopoly, each firm has a marginal cost curve MC ! 10 # Qi, i ! 1, 2. The market demand curve is P ! 50 " Q, where Q ! Q1 # Q2.a) What are the Cournot equilibrium quantities and price in this market?b) What would be the equilibrium price in this market if the two
13.7. Let’s consider a market in which two firms compete as quantity setters, and the market demand curve is given by Q ! 4000 " 40P. Firm 1 has a constant marginal cost equal to MC1 ! 20, while Firm 2 has a constant marginal cost equal to MC2 ! 40.a) Find each firm’s reaction function.b) Find
13.6. Zack and Andon compete in the peanut market.Zack is very efficient at producing nuts, with a low marginal cost cZ ! 1; Andon, however, has a constant marginal cost cA ! 10. If the market demand for nuts is P ! 100 " Q, find the Cournot equilibrium price and the quantity and profit level for
13.5. A homogeneous products duopoly faces a market demand function given by P ! 300 " 3Q, where Q ! Q1 # Q2. Both firms have a constant marginal cost MC ! 100.a) What is Firm 1’s profit-maximizing quantity, given that Firm 2 produces an output of 50 units per year?What is Firm 1’s
13.4. In the following, let the market demand curve be P ! 70 " 2Q, and assume all sellers can produce at a constant marginal cost of c ! 10, with zero fixed costs.a) If the market is perfectly competitive, what is the equilibrium price and quantity?b) If the market is controlled by a monopolist,
13.3. Outer Baldonia is a largely rural country with many small towns. Each town typically contains a retail store selling livestock feed. In virtually all towns, there is only one such store. The farmers who purchase feed?
13.2. The cola industry in the country of Inner Baldonia consists of five sellers: two global brands, Coke and Pepsi, and three local competitors, Bright, Quite, and Zight. Consumers view these products as similar, but not identical. The market shares of the five sellers are as follows:Firm Market
13.1. Beryllium oxide is a chemical compound used in pharmaceutical applications. Beryllium oxide can only be made in one particular way, and all firms produce their version of beryllium oxide to the exact same standards of purity and safety. The largest firms have market shares given in the
9. Why is it the case in a long-run monopolistically competitive equilibrium that the firm’s demand curve is tangent to its average cost curve? Why could it not be a long-run equilibrium if the demand curve “cut through”the average cost curve?
8. What are the characteristics of a monopolistically competitive industry? Provide an example of a monopolistically competitive industry.
7. Explain why, in the Bertrand model of oligopoly with differentiated products, a greater degree of product differentiation is likely to increase the markup between price and marginal cost.
6. What is the difference between vertical product differentiation and horizontal product differentiation?
5. What is the role played by the competitive fringe in the dominant firm model of oligopoly? Why does an increase in the size of the fringe result in a reduction in the dominant firm’s profit-maximizing price?
4. Explain the difference between the Bertrand model of oligopoly and the Cournot model of oligopoly. In a homogeneous products oligopoly, what predictions do these models make about the equilibrium price relative to marginal cost?
3. Why is the Cournot equilibrium price less than the monopoly price? Why is the Cournot equilibrium price greater than the perfectly competitive price?
2. What is a reaction function? Why does the Cournot equilibrium occur at the point at which the reaction functions intersect?
1. Explain why, at a Cournot equilibrium with two firms, neither firm would have any regret about its output choice after it observes the output choice of its rival.
Illustrate graphically the short-run and long-run equilibrium in a monopolistically competitive industry?
Compute the Bertrand equilibrium in a differentiated product oligopoly and illustrate it graphically.
Explain how horizontal product differentiation affects the shape of a firm’s demand curve in a differentiated product oligopoly.
Differentiate between horizontal product differentiation and vertical product differentiation.
Compute the equilibrium in the dominant firm model and illustrate it graphically.
Find the Stackelberg equilibrium and explain how and why it differs from the Cournot equilibrium.
Explain how and why the Cournot equilibrium differs from a Bertrand equilibrium in a homogeneous products oligopoly.
Compute the equilibrium in the Cournot model of oligopoly and illustrate it graphically.
Sketch the reaction function for a quantity-setting or price-setting oligopoly firm.
Find the reaction function that shows how one firm sets its profit-maximizing quantity or price given the quantity or price of the other firm.
Describe the conditions that characterize different types of market structures, including oligopoly markets, dominant firm markets, and monopolistically competitive markets.
12.30. The motor home industry consists of a small number of large firms. In 2003, producers of motor homes had an average advertising sales ratio of 1.8 percent. Assuming that the price elasticity of demand facing a typical motor home producer is #4, what is the advertising elasticity of demand
12.28. You operate the only fast-food restaurant in town, selling burgers and fries. There are only two customers, one of whom is on the Atkins diet and the other on the Zone diet, whose willingness to pay for each item is displayed in the following table. For simplicity, assume you have zero fixed
12.27. You are the only European firm selling vacation trips to the North Pole. You know only three customers are in the market. You offer two services, round trip airfare and a stay at the Polar Bear Hotel. It costs you 300 euros to host a traveler at the Polar Bear and 300 euros for the airfare.
12.26. A small island near a major city has a beautiful beach. The company that owns the island sells day passes for the beach, including travel by ferry to and from the beach. Because the beach is small, the company does not want to sell more than 200 excursion tickets per day. The company knows
12.25. A summer theater has a capacity of 200 seats for its Saturday evening concerts. The marginal cost of admitting a spectator is zero up to that capacity. The theater wants to maximize profits and recognizes that there are two kinds of customers. It offers discounts to senior citizens and
12.24. An airline has 200 seats in the coach portion of the cabin of an Airbus A340. It is attempting to determine how many seats it should sell to business travelers and how many to vacation travelers on a flight between Chicago and Dubai that departs on Monday morning, January 25. It has
12.23. A cruise line has space for 500 passengers on each voyage. There are two market segments: elderly passengers and younger passengers. The demand curve for the elderly market segment is Q1 ! 750 " 4P1. The demand curve for the younger market segment is Q2 !850 " 2P2. In each equation, Q
12.22. A seller produces output with a constant marginal cost MC ! 2. Suppose there is one group of consumers with the demand curve P1 ! 16 " Q1, and another with the demand curve P2 ! 10 " (1/2)Q2.a) If the seller can discriminate between the two markets, what prices would she charge to each group
12.21. A pipeline transports gasoline from a refinery at point A to destinations at R and T. The marginal cost of transporting gasoline to each destination is MC ! 2. The pipeline has a fixed cost of 160. The demand curve for the transportation of gasoline from A to R is QR ! 100 " 10PR, where QR
12.20. La Durazno is the only resort hotel on a small desert island off the coast of South America. It faces two market segments: bargain travelers and high-end travelers. The demand curve for bargain travelers is given by Q1 ! 400 " 2P1. The demand curve for high-end travelers is given by Q2 ! 500
12.19. J. Cigliano (“Price and Income Elasticities for Airline Travel: The North Atlantic Market,” Business Economics, September 1980) estimated the price elasticity of demand for regular (full-fare) travel in coach class in the North Atlantic market to be He also found the price elasticity of
12.18. There is another way to solve Learning-ByDoing Exercise 12.5. Recall that marginal revenue can be written as MR ! P # ($P/$Q)Q. By factoring out P, we can write Since third-degree price discrimination means that marginal cost equals marginal revenue in each market segment, the
12.16. Consider Problem 12.14 with the following change. Suppose the demand for the drug in Europe becomes QE ! 55 " 0.5PE. Will third-degree price discrimination increase the firm’s profits?12.17. Think about the problem that Acme faces in Problem 12.14. Consider any demand curves for the drug
12.15. Consider Problem 12.14 with the following change. Suppose the demand for the drug in Europe declines to QE ! 30 " PE. If the firm cannot price discriminate, will it be in the firm’s interest to sell on both continents?
12.14. Suppose that Acme Pharmaceutical Company discovers a drug that cures the common cold. Acme has plants in both the United States and Europe and can manufacture the drug on either continent at a marginal cost of 10. Assume there are no fixed costs. In Europe, the demand for the drug is QE ! 70
12.13. A monopolist faces two market segments. In each market segment, the demand curve is of the constant elasticity form. In market segment 1, the price elasticity of demand is "3, while in market segment 2, the price elasticity of demand is "1.5. The monopolist has a constant marginal cost of $5
12.12. Consider a market with 100 identical individuals, each with the demand schedule for electricity of P !10 " Q. They are served by an electric utility that operates with a fixed cost 1,200 and a constant marginal cost of 2. A regulator would like to introduce a two-part tariff, where S is a
12.11. In part (c) of Learning-By-Doing Exercise 12.3, we suggested that the profit-maximizing structure for the first and second blocks for Softco is something other than the pricing structure we determined in part (b), selling the first 60 units at a price of $40 apiece, and selling any quantity
12.10. Suppose that you are a monopolist who produces gizmos, Z, with the total cost function C(Z) ! F #50Z, where F represents the firm’s fixed cost. Your marginal cost is MC ! 50. Suppose also that there is only one
12.9. Consider the manufacturer of golf balls in Problem 12.8. The firm faces the demand curve P ! 100 " Q, and operates with a marginal cost of 10 for all units produced. Among all the possible block tariffs (with two blocks), what block tariff structure will maximize profit?In other words, what
12.8. Fore! is a seller of golf balls that wants to increase its revenues by offering a quantity discount. For simplicity, assume that the firm sells to only one customer and that the demand for Fore!’s golf balls is P ! 100 " Q. Its marginal cost is MC ! 10. Suppose that Fore! sells the first
12.7. Suppose the monopolist in Problem 12.6 incurs a marginal cost of 5.50 euros for every unit it produces.The firm has no fixed costs.a) How many units will it produce if it wants to maximize its profit? (Remember, it must produce whole units.)b) What will its profit be when it maximizes
12.6. Suppose a monopolist is able to engage in perfect first-degree price discrimination in a market. It can sell the first unit at a price of 10 euros, the second at a price of 9 euros, the third at a price of 8 euros, the fourth at a price of 7 euros, the fifth at a price of 6 euros, and the
12.5. A natural monopoly exists in an industry with a demand schedule P ! 100 " Q. The marginal revenue schedule is then MR ! 100 " 2Q. The monopolist operates with a fixed cost F, and a total variable cost TVC !20Q. The corresponding marginal cost is thus constant and equal to 20.a) Suppose the
12.4. A firm serving a market operates with total variable cost TVC ! Q2. The corresponding marginal cost is MC ! 2Q. The firm faces a market demand represented by P ! 40 " 3Q.a) Suppose the firm sets the uniform price that maximizes profit. What would that price be?b) Suppose the firm were able to
12.3. Suppose a monopolist producing Q units of output faces the demand curve P ! 20 " Q. Its total cost when producing Q units of output is TC ! F # Q2, where F is a fixed cost. The marginal cost is MC ! 2Q.a) For what values of F can a profit-maximizing firm charging a uniform price earn at least
12.2. Suppose a profit-maximizing monopolist producing Q units of output faces the demand curve P ! 20 " Q.Its total cost when producing Q units of output is TC !24 # Q2. The fixed cost is sunk, and the marginal cost curve is MC ! 2Q.a) If price discrimination is impossible, how large will the
12.1. Which of the following are examples of first-degree, second-degree, or third-degree price discrimination?a) The publishers of the Journal of Price Discrimination charge a subscription price of $75 per year to individuals and $300 per year to libraries.
12. Even if a monopolist knows that advertising shifts the demand curve for its product to the right, why might it decide not to advertise at all? If it does advertise, what factors determine how much advertising it will do?
11. How might bundling increase a firm’s profits? When is bundling not likely to increase profits?
10. Why might a firm try to implement a tying arrangement? What is the difference between tying and bundling?
8. Suppose a company is currently charging a uniform price for its two products, creamy and crunchy peanut butter. Will third-degree price discrimination necessarily improve its profit? Would the firm ever be worse off with price discrimination?9. How might screening help a firm price
7. What is the difference between a uniform price and a nonuniform (nonlinear) price? Give an example of a nonlinear price.
6. How large will the deadweight loss be if a profitmaximizing firm engages in perfect first-degree price discrimination?
5. With first-degree price discrimination, why is the marginal revenue curve the same as the demand curve?
4. What are the differences among first-degree, seconddegree, and third-degree price discrimination?
3. Why must a firm prevent resale if it is to price discriminate successfully?
2. Does a firm need to be a monopolist to price discriminate?
1. Why must a firm have at least some market power to price discriminate?
Explain how a firm can use advertising, a form of nonprice competition, to create and capture surplus.Although advertising can increase the demand for a product, it is costly. You will be able to show how decisions about the level of advertising and pricing should be made if the firm is to capture
Show how a firm can capture more surplus if it bundles two related products together and sells them as a package.
Explain why firms often create different versions of a product: a low-quality, low-price version that appeals to price-sensitive consumers, and a high-quality, high-price version to appeal to less pricesensitive consumers.
Analyze three types (degrees) of price discrimination, and show how price discrimination affects prices, consumer surplus, and producer surplus.
Demonstrate why a firm must have information about reservation prices or elasticities of demand and be able to prevent resale to succeed with price discrimination.
Explain how a firm with market power can capture more surplus by engaging in price discrimination—that is, by charging consumers different prices for a good.
11.32. A hospital is a monopsonist in the market for nursing services in a city. At its profit-maximizing input combination, the elasticity of supply for nursing services is %1. What does this tell you about the magnitude of the marginal revenue product of labor relative to the wage that the firm
11.31. National Hospital is the only employer of nurses in the country of Castoria, and it acts as a profitmaximizing monopsonist in the market for nursing labor.The marginal revenue product for nurses is w ! 50 "2N, where w is the wage rate and N is the number of nurses employed (measured in
11.30. A firm produces output, measured by Q, which is sold in a market in which the price is 4, regardless of the size of Q. The output is produced using only one input, labor (measured by L); the production function is Q(L) !10L. Labor is supplied by competitive suppliers, and everywhere along
11.29. A firm produces output, measured by Q, which is sold in a market in which the price P ! 20, regardless of the size of Q. The output is produced using only one input, labor (measured by L); the production function is Q(L) ! L. There are many suppliers of labor, and the supply schedule is w !
11.28. A coal mine operates with a production function Q ! L/2, where L is the quantity of labor it employs and Q is total output. The firm is a price taker in the output market, where the price is currently 32. The firm is a monopsonist in the labor market, where the supply curve for labor is w !
11.27. The demand curve for a certain good is P ! 100 " Q. The marginal cost for a monopolist is MC(Q) ! Q, for Q # 30. The maximum that can be supplied in this market is Q ! 30, that is, the marginal cost is infinite for Q $ 30.a) What price will the profit-maximizing monopolist set?b) What is the
11.26. Suppose that a monopolist’s market demand is given by P ! 100 # 2Q and that marginal cost is given by MC ! Q/2.a) Calculate the profit-maximizing monopoly price and quantity.b) Calculate the price and quantity that arise under perfect competition with a supply curve P ! Q/2.c) Compare
11.25. A firm has a monopoly in the production of a software application in Europe. The demand schedule in Europe is Q1 ! 120 # P, where Q1 is the amount sold in Europe when the price is P. The firm’s marginal cost is 20.a) What price would the firm choose if it wishes to maximize profits?b) Now
11.24. Suppose that you are hired as a consultant to a firm producing a therapeutic drug protected by a patent that gives a firm a monopoly in two markets. The drug can be transported between the two markets at no cost, so the firm must charge the same price in both markets. The demand schedule in

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