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microeconomics
Microeconomics 9th Edition Robert Pindyck, Daniel Rubinfeld - Solutions
=+8. The demand for labor by an industry is given by the curve L = 1200 - 10w, where L is the labor demanded per day and w is the wage rate. The supply curve is given by L = 20w. What is the equilibrium wage rate and quantity of labor hired? What is the economic rent earned by workers?
=+2. Assume that workers whose incomes are less than$10,000 currently pay no federal income taxes.Suppose a new government program guarantees each worker $5000, whether or not he or she earns any income. For all earned income up to $10,000, the worker must pay a 50-percent tax. Draw the budget
=+d. Suppose that the price of the product remains at$2 and the wage at $16, but that there is a technological breakthrough that increases output by 25 percent for any given level of labor. Find the new profit-maximizing L.
=+1. Suppose that the wage rate is $16 per hour and the price of the product is $2. Values for output and labor are in units per hour.q l 0 0 20 1 35 2 47 3 57 4 65 5 70 6a. Find the profit-maximizing quantity of labor.
=+8. Currently the National Football League has a system for drafting college players by which each player is picked by only one team. The player must sign with that team or not play in the league. What would happen to the wages of both newly drafted and more experienced football players if the
=+5. Rock musicians sometimes earn several million dollars per year. Can you explain such large incomes in terms of economic rent?
=+4. Compare the hiring choices of a monopsonistic and a competitive employer of workers. Which will hire more workers, and which will pay the higher wage? Explain.
=+b. Suppose you are a building contractor. You plan to improve the house and then to resell it at a profit.How does this situation affect your answer to (a)?
=+13. You are in the market for a new house and have decided to bid for a house at auction. You believe that the value of the house is between $125,000 and $150,000, but you are uncertain as to where in the range it might be. You do know, however, that the seller has reserved
=+She often finds that on the rare occasions in which she does bid successfully, she is disappointed—the antique cannot be sold at a profit. Can you explain the difference in her success between the two sets of circumstances?
=+At the outset, the players decide by lot the order in which they will fire, and each player can choose any remaining balloon as his target. Everyone knows that
=+11. Three contestants, A, B, and C, each has a balloon and a pistol. From fixed positions, they fire at each other’s balloons. When a balloon is hit, its owner is out. When only one balloon remains, its owner gets a $1000 prize.
=+c. What happens to social welfare (the sum of consumer surplus and producer profit) as a result of the threat of entry in this market? What happens to equilibrium price? What might this imply about the role of potential competition in limiting market power?
=+ii. If Defendo adopts Technology B and Offendo enters the market, what will be the profit of each firm? Would Offendo choose to enter the market given these profits?
=+b. Suppose Defendo expects its archrival, Offendo, to consider entering the market shortly after Defendo introduces its new product. Offendo will have access only to Technology A. If Offendo does enter the market, the two firms will play a Cournot game (in quantities) and arrive at the
=+a. Suppose Defendo were certain that it would maintain its monopoly position in the market for the entire product lifespan (about five years) without threat of entry. Which technology would you advise Defendo to adopt? What would be Defendo’s profit given this choice?
=+How will your answers to (c) change in this case?
=+In each round, you and your competitor announce your outputs at the same time. You want to maximize the sum of your profits over the 10 rounds.How much will you produce in the first round?
=+ How much will you produce in this case, and how much do you think your competitor will produce?
=+b. Suppose you are told that you must announce your output before your competitor does.
=+8. You are a duopolist producer of a homogeneous good.Both you and your competitor have zero marginal costs. The market demand curve is P = 30 - Q where Q = Q1 + Q2.Q1 is your output and Q2 your competitor’s output. Your competitor has also read this book.
=+ How might this change the equilibrium?
=+Japan is concerned that U.S. politicians may want to penalize Japan even if that does not maximize U.S. welfare.
=+own interest. Does either country have a dominant strategy?
=+a. Assume that each country knows the payoff matrix and believes that the other country will act in its
=+7. We can think of U.S. and Japanese trade policies as a prisoners’ dilemma. The two countries are considering policies to open or close their import markets. The payoff matrix is shown below.JApAn Open Close u.s.Open 10, 10 5, 5 Close -100, 5 1, 1
=+6. Two competing firms are each planning to introduce a new product. Each will decide whether to produce Product A, Product B, or Product C. They will make their choices at the same time. The resulting payoffs are shown below.Firm 2 A B C A -10, -10 0, 10 10, 20 Firm 1 B 10, 0 -20, -20 -5, 15 C
=+5. Two major networks are competing for viewer ratings in the 8:00–9:00 p.m. and 9:00–10:00 p.m. slots on a given weeknight. Each has two shows to fill these time periods and is juggling its lineup. Each can choose to put its “bigger” show first or to place
=+c. Getting a head start costs money. (You have to gear up a large engineering team.) Now consider the two-stage game in which, first, each firm decides
=+b. Suppose that both firms try to maximize profits, but that Firm A has a head start in planning and can commit first. Now what will be the outcome?
=+Market research indicates that the resulting profits to each firm for the alternative strategies are given by the following payoff matrix:Firm B High Low Firm A High 50, 40 60, 45 Low 55, 55 15, 20
=+7. Suppose you and your competitor are playing the pricing game shown in Table 13.8 (page 512). Both of
=+1. What is the difference between a cooperative and a noncooperative game? Give an example of each.
==+c. At this shipping level, which firm has the most incentive to cheat?
==+b. If the cartel decided to ship 10 cartons per month and set a price of $25 per carton, how should output be allocated among the firms?
==+a. Tabulate total, average, and marginal costs for each firm for output levels between 1 and 5 cartons per month (i.e., for 1, 2, 3, 4, and 5 cartons).
==+*14. A lemon-growing cartel consists of four orchards.Their total cost functions are TC1 = 20 + 5Q1 2TC2 = 25 + 3Q2 2TC3 = 15 + 4Q3 2TC4 = 20 + 6Q4 2TC is in hundreds of dollars, and Q is in cartons per month picked and shipped.
==+optimal production, and non-OPEC production on the diagram. Now, show on the diagram how the various curves will shift and how OPEC’s optimal price will change if non-OPEC supply becomes more expensive because reserves of oil start running out.
==+a. Draw the world demand curve W, the non-OPEC supply curve S, OPEC’s net demand curve D, and OPEC’s marginal revenue curve. For purposes of approximation, assume OPEC’s production cost is zero. Indicate OPEC’s optimal price, OPEC’s
==+to describe world demand W and noncartel (competitive) supply S. Reasonable numbers for the price elasticities of world demand and noncartel supply are -1>2 and 1/2, respectively. Then, expressing W and S in millions of barrels per day (mb/d), we could write W = 160P- 1>2 and S = 131 3 2P1>2
==+ how much will it sell, and what will its profit be? (Hint: Maximize the profit of each firm with respect to its price.)
==+Find the resulting Nash equilibrium. What price will each firm charge,
==+a. Suppose the two firms set their prices at the same time.
==+the difference in prices; if the two firms colluded and set the same price, they could make that price as high as they wanted, and earn infinite profits. Marginal costs are zero.
==+*11. Two firms compete by choosing price. Their demand functions are Q1 = 20 - P1 + P2 and Q2 = 20 + P1 - P2 where P1 and P2 are the prices charged by each firm, respectively, and Q1 and Q2 are the resulting demands.Note that the demand for each good depends only on
==+quantity or the cartel quantity. To aid in making the decision, the manager of WW constructs a payoff matrix like the one below. Fill in each box with the profit of WW and the profit of BBBS. Given this payoff matrix, what output strategy is each firm likely to pursue?ProFit PayoFF matrix
==+c. The managers of these firms realize that explicit agreements to collude are illegal. Each firm must decide on its own whether to produce the Cournot
==+ The industry price? The output and the profit for each firm in this case?
==+b. It occurs to the managers of WW and BBBS that they could do a lot better by colluding. If the two firms collude, what will be the profit-maximizing choice of output?
==+a. If each firm acts to maximize its profits, taking its rival’s output as given (i.e., the firms behave as Cournot oligopolists), what will be the equilibrium quantities selected by each firm? What is total output, and what is the market price? What are the profits for each firm?
==+what are the equilibrium values of QE, QD, and P?
==+What are the equilibrium values of QE, QD, and P?
==+c. Suppose the Everglow manager guesses correctly that Dimlit is playing Cournot, so Everglow plays Stackelberg.
==+What are the equilibrium values of QE, QD, and P?
==+b. Top management in both firms is replaced. Each new manager independently recognizes the oligopolistic nature of the light bulb industry and plays Cournot.
==+What are the equilibrium values of QE, QD, and P?
==+a. Calculate the Cournot-Nash equilibrium for each firm, assuming that each chooses the output level that maximizes its profits when taking its rival’s output as given. What are the profits of each firm?
==+8. Suppose the airline industry consisted of only two firms: American and Texas Air Corp. Let the two firms have identical cost functions, C(q) = 40q. Assume that the demand curve for the industry is given by P = 100 - Q and that each firm expects the other to behave as a Cournot competitor.
==+the firms are at (i) Cournot equilibrium, (ii) collusive equilibrium, and (iii) Bertrand equilibrium.a. Because Firm A must increase wages, its MC increases to $80.b. The marginal cost of both firms increases.c. The demand curve shifts to the right.
==+7. Suppose that two competing firms, A and B, produce a homogeneous good. Both firms have a marginal cost of MC = $50. Describe what would happen to output and price in each of the following situations if
==+1 abides by the agreement but Firm 2 cheats by increasing production. How many widgets will Firm 2 produce? What will be each firm’s profits?
==+d. Returning to the duopoly of part (b), suppose Firm
==+where Q = Q1 + Q2. Until recently, both firms had zero marginal costs. Recent environmental regulations have increased Firm 2’s marginal cost to $15. Firm 1’s marginal cost remains constant at zero. True or false: As a result, the market price will rise to the monopoly level.
==+5. Two firms compete in selling identical widgets. They choose their output levels Q1 and Q2 simultaneously and face the demand curve P = 30 - Q
==+makes its output decisions before Firm 2). Find the reaction curves that tell each firm how much to produce in terms of the output of its competitor.
==+the Stackelberg model to analyze what will happen if one of the firms makes its output decision before the othera. Suppose Firm 1 is the Stackelberg leader (i.e.,
==+4. This exercise is a continuation of Exercise 3. We return to two firms with the same constant average and marginal cost, AC = MC = 5, facing the market demand curve Q1 + Q2 = 53 - P. Now we will use
==+the Cournot equilibrium. How much will each firm produce, what will be the market price, and how much profit will each firm earn? Also, show that as N becomes large, the market price approaches the price that would prevail under perfect competition.
==+*e. Suppose there are N firms in the industry, all with the same constant marginal cost, MC = $5. Find
==+Find each firm’s “reaction curve” (i.e., the rule that gives its desired output in terms of its competitor’s output).
==+c. Suppose (as in the Cournot model) that each firm chooses its profit-maximizing level of output on the assumption that its competitor’s output is fixed.
==+b. Suppose a second firm enters the market. Let Q1 be the output of the first firm and Q2 be the output of the second. Market demand is now given by Q1 + Q2 = 53 - P
==+3. A monopolist can produce at a constant average (and marginal) cost of AC = MC = $5. It faces a market demand curve given by Q = 53 - P.
==+b. What is each firm’s equilibrium output and profit if they behave noncooperatively? Use the Cournot model. Draw the firms’ reaction curves and show the equilibrium.
==+How much will each firm produce? How would your answer change if the firms have not yet entered the industry?
==+What is the joint profit-maximizing level of output?
==+a. Suppose both firms have entered the industry.
==+Explain how the price leader determines a profit-maximizing price.
==+9. Why does price leadership sometimes evolve in oligopolistic markets?
==+ Why does price rigid ity occur in oligopolistic markets?
==+Why is the equilibrium stable?
==+7. Explain the meaning of a Nash equilibrium when firms are competing with respect to price.
==+Even if they can’t collude, why don’t firms set their outputs at the joint profitmaximizing levels (i.e., the levels they would have chosen had they colluded)?
==+4. Why is the Cournot equilibrium stable? (i.e., Why don’t firms have any incentive to change their output levels once in equilibrium?)
==+What will happen to its demand curve in the long run?
==+Suppose a monopolistically competitive firm is making a profit in the short run.
==+What happens to the equilibrium price and quantity in such a market if one firm introduces a new, improved product?
==+1. What are the characteristics of a monopolistically competitive market?
==+ What quantity, if any, will be sold to the outside market?
==+ At what price, if any, should leather be sold to the outside market?
==+What is the optimal transfer price for the use of leather by the downstream division?
==+Suppose the outside demand for leather is given by P = 32 - QL.
==+c. Now suppose the leather is unique and of extremely high quality. Therefore, the Form Division may act as a monopoly supplier to the outside market as well as a supplier to the downstream division.
==+Find the optimal transfer price.
==+Will Reebok buy any leather in the outside market?
==+How much should it supply to the outside market?
==+b. Leather can be bought and sold in a competitive market at the price of PF = 1.5. In this case, how much leather should the Form Division supply internally?
==+a. What is the optimal transfer price?
==+where QL is the quantity of leather (in square yards)produced. Excluding leather, the cost function for running shoes is TCs = 2Qs
==+4. Reebok produces and sells running shoes. It faces a market demand schedule P = 11 - 1.5Q, where Qs is the number of pairs of shoes sold and P is the price in dollars per pair of shoes. Production of each pair of shoes requires 1 square yard of leather. The leather is shaped and cut by the
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