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microeconomics principles applications
Microeconomics Theory And Applications With Calculus 4th Global Edition Jeffrey M. Perloff - Solutions
6.7 In Solved Problem 14.4, what fixed cost would result in four firms operating in the monopolistically competitive equilibrium? What are the equilibrium quantities and prices?
6.6 Exercise 6.5 shows that a monopolistically competitive firm maximizes its profit where it is operating at less than full capacity. Does this result depend upon whether firms produce identical or differentiated products? Why?
*6.5 Show that a monopolistically competitive firm maximizes its profit where it is operating at less than full capacity or minimum efficient scale, which is the smallest quantity at which the average cost curve reaches its minimum (the bottom of a U-shaped average cost curve). The firm’s minimum
6.4 Does an oligopoly or a monopolistically competitive firm have a supply curve? Why or why not?(Hint: See the discussion in Chapter 11 of whether a monopoly has a supply curve.)
6.3 In a monopolistically competitive market, the government applies a specific tax of $1 per unit of output. What happens to the profit of a typical firm in this market? Does the number of firms in the market change? Why?
6.2 In the monopolistically competitive airlines model, what is the equilibrium if firms face no fixed costs?
6.1 What is the effect of a government subsidy that reduces the fixed cost of each firm in an industry in a Cournot monopolistic competition equilibrium?
5.9 Two pizza parlors are located within a few feet of each other on the Avenue of the Americas in New York City. Both were selling a slice of pizza for $1(Matt Flegenheimer, “$1 Pizza Slice Is Back After a Sidewalk Showdown Ends Two Parlors’ Price War,”New York Times, September 5, 2012).
5.8 Consider two firms that provide a differentiated product, which they produce at the same constant marginal cost, MC = 3. The demand function for Firm 1 is q1 = 10 - p1 - 0.5p2 and for Firm 2 is q2 = 20 - p2 - 0.5p1, where p1 is Firm 1’s price and p2 is Firm 2’s price. What are the
5.7 Consider two price-setting oligopolies supplying consumers in a certain region of a country. Firm 1 employs many of the people living there and the local government subsidizes its operations. In all other respects, the firms are identical—they have the same constant marginal cost, MC = 4, and
5.6 In the Coke and Pepsi example, what is the effect of a specific tax, τ, on the equilibrium prices? (Hint:What does the tax do to the firm’s marginal cost?You do not have to use math to provide a qualitative answer to this problem.)
5.5 Solve for the Nash-Bertrand equilibrium for the firms described in Exercise 5.3 if Firm 1’s marginal cost is $30 per unit and Firm 2’s marginal cost is $10 per unit. M
5.4 Solve for the Nash-Bertrand equilibrium for the firms described in Exercise 5.3 if both firms have a marginal cost of $0 per unit. M
*5.3 Suppose that two oligopoly firms set prices to maximize their profits. Each faces the same constant marginal cost, m = 15. The demand function for Firm 1 is q1 = 120 - 6p1 - 2p2 and for Firm 2 is q2 = 120 - 6p2 - 2p1, where p1 is Firm 1’s price and p2 is Firm 2’s price. What are the
*5.2 Will price be lower if duopoly firms set price or if they set quantity? Under what conditions can you give a definitive answer to this question?
5.1 What happens to the homogeneous-good NashBertrand equilibrium price if the number of firms increases? Why?
4.5 Being the first company to enter a market can provide a significant and sustained market-share advantage over later entrants. However, other companies may enter through innovative marketing or to take advantage of shifting demands in the marketplace. Consider a market that is at first served by
4.4 Two firms, each in a different country, sell homogeneous output in a third country. Government 1 subsidizes its domestic firm by s per unit. The other government does not react. In the absence of government intervention, the market has a NashCournot equilibrium. Suppose demand is linear, p = 1
4.3 Show the effect of a subsidy on Firm 1’s bestresponse function in Solved Problem 14.3 if the firm faces a general demand function p(Q). M
4.2 Determine the Stackelberg equilibrium with one leader firm and two follower firms if the market demand curve is linear and each firm faces a constant marginal cost, m, and no fixed cost. M
*4.1 Duopoly quantity-setting firms face the market demand p = 200 - 5Q Each firm has a marginal cost of $20 per unit.a. What is the Nash-Cournot equilibrium?b. What is the Stackelberg equilibrium when Firm 1 moves first? M
*3.19 An incumbent firm, Firm 1, faces a potential entrant, Firm 2, that has a lower marginal cost. The market demand curve is p = 120 - q1 - q2. Firm 1 has a constant marginal cost of $20, while Firm 2’s is $10.a. What are the Nash-Cournot equilibrium price, quantities, and profits without
3.18 In a market, duopoly firms produce differentiated products. The inverse demand function for Firm 1 is p1 = 104 - 10q1 - 2q2. The inverse demand function for Firm 2 is p2 = 42 - 2q2 - q1. Each firm has a constant marginal cost of MC = 6. What are the Nash-Cournot equilibrium quantities and
*3.17 To examine the trade-off between efficiency and market power from a merger, consider a market with two firms that sell identical products. Firm 1 has a constant marginal cost of 1, and Firm 2 has a constant marginal cost of 2. The market demand is Q = 15 - p.a. Solve for the Nash-Cournot
3.16 How would the Nash-Cournot equilibrium change in the airline example if United’s marginal cost were$100 and American’s were $200? (Hint: See Solved Problem 14.1.) M
3.15 In 2015, Spirit reported that its “average cost per available seat mile excluding special items and fuel”was 5.7¢ compared to 8.5¢ for Southwest. Assuming that Spirit and Southwest compete on a single route, use a graph to show that their equilibrium quantities differ. (Hint: See Solved
3.14 Graph the best-response curve of the second firm in Solved Problem 14.1 if its marginal cost is m and if it is m + x. Add the first firm’s best-response curve and show how the Nash-Cournot equilibrium changes as its marginal cost increases.
3.13 A duopoly faces an inverse market demand function of p = 120 - Q. Firm 1 has a constant marginal cost of 20. Firm 2’s constant marginal cost is 40.Calculate the output of each firm, market output, and price in (a) a collusive equilibrium or (b) a NashCournot equilibrium. (Hint: See Solved
*3.12 Why does differentiating its product allow an oligopoly to charge a higher price?
*3.11 The viatical settlement industry enables terminally ill consumers, typically HIV patients, to borrow against equity in their existing life insurance contracts to finance their consumption and medical expenses.The introduction and dissemination of effective anti-HIV medication in 1996 reduced
3.10 The Application “Deadweight Losses in the Food and Tobacco Industries” shows that the deadweight loss as a fraction of sales varies substantially across industries. One possible explanation is that ?
3.9 Consider the Cournot model with n firms. The inverse linear market demand function is p = a - bQ. Each of the n identical firms has the same cost function C(qi) = Aqi + 1 2Bqi 2, where a 7 A. In terms of n, what is each firm’s Nash equilibrium output and profit and the equilibrium price? As n
3.8 In 2005, the prices for 36 prescription painkillers shot up as much as 15% after Merck yanked its once-popular arthritis drug Vioxx from the market due to fears that it caused heart problems (“Prices Climb as Much as 15% for Some Painkillers,” Los Angeles Times, June 3, 2005, C3). Can this
3.7 Suppose there are n firms selling a homogeneous product at a constant marginal cost, m = 50, in a Cournot market. The inverse market demand curve is p = 200 - 2Q, where Q = nq. What is the output of each firm, and the market quantity and price when the number of firms is 1, 2, 5, 14, and
*3.6 Your college is considering renting space in the student union to one or two commercial textbook stores. The rent the college can charge per square foot of space depends on the profit (before rent) of the firms and hence on the number of firms. Which number of stores is better for the college
*3.5 In a Nash-Cournot equilibrium, each of the n firms faces a constant marginal cost m, the inverse market demand function is p = a - bQ, and the government assesses a specific tax of τ per unit. What is the incidence of this tax on consumers? M
3.4 In 2008, cruise ship lines announced they were increasing prices from $7 to $9 per person per day because of increased fuel costs. According to one analyst, fuel costs for Carnival Corporation’s 84-ship fleet jumped $900 million to $2 billion in 2008 and its cost per passenger per day jumped
3.3 According to Robert Guy Matthews, “Fixed Costs Chafe at Steel Mills,” Wall Street Journal, June 10, 2009, stainless steel manufacturers were increasing prices even though the market demand curve had shifted to the left. In a letter to its customers, one of these companies announced that
3.2 In the initial Cournot oligopoly equilibrium, both firms have constant marginal costs, m, and no fixed costs, and the market has a barrier to entry. Use calculus to show what happens to the best-response function of firms if both firms now face a fixed cost of F. M
3.1 What is the duopoly Nash-Cournot equilibrium if the market demand function is Q = 500 - 10p and each firm’s marginal cost is 5¢ per unit? M
2.7 In a market in which there are a larger number of firms, government may be less reluctant to prevent firms from merging. Do you agree with this view?
2.6 In May 2016, the European Union officially blocked the merger of British telecom companies Three U.K., owned by CK Hutchison, and O2, owned by Telefónica. The reason given was that the resulting reduction in the number of network-owning operators from four to three would lead to less choice
2.5 In 2013, a federal judge ruled that Apple colluded with five major U.S. publishers to artificially drive up the prices of e-books (which could be read on Apple’s iPad). Apple collects a 30% commission on the price of a book from the publisher. Why would?
14.1, describe a cartel’s price determination process and show how much more profit a firm would gain by cheating (producing more than the cartel’s quota).
2.4 Firms have an incentive to form cartels in which they collude in setting prices or quantities to increase profits. Examples of cartels, some being government sanctioned, vary among countries and over time.They are numerous and include markets for agricultural products, industrial products,
2.3 The European Union fined Sotheby’s auction house more than €20 million for operating a price-fixing cartel with Christie’s auction house (see “The Art of Price Fixing” in Pearson MyLab Economics, Chapter Resources, Chapter 14). The two auction houses were jointly setting the
2.2 A market has an inverse demand curve p = 100 - 2Q and four firms, each of which has a constant marginal cost of MC = 20. If the firms form a profit-maximizing cartel and agree to operate subject to the constraint that each firm will produce the same output level, how much does each firm
2.1 Many retail stores offer to match or beat the price offered by a rival store. Explain why firms that belong to a cartel might make this offer.
1.1 Which market structure best describes (a) car manufacturing, (b) restaurants in a city, (c) farms that grow soybeans, and (d) electricity distribution in a city? Why?
5.2 Derive the mixed strategy equilibrium if both Intel and AMD act simultaneously in the game in the Challenge Solution. What is the expected profit of each firm? (Hint: see Solved Problems 13.1 and 13.2 and the Challenge Solution.) M
5.1 In the game between Intel and AMD in the Challenge Solution, suppose that each firm earns a profit of 9 if both firms advertise. What is the new subgame perfect Nash equilibrium outcome? Show in a game tree.
4.2 A prisoners’ dilemma game is played for a fixed number of periods. The fully rational solution is for each player to defect in each period. However, in experiments with students, players often cooperate for a significant number of periods if the total number of periods is fairly large (such
4.1 Draw a game tree that represents the ultimatum game in which the proposer is a first mover who decides how much to offer a responder and the responder then decides to accept or reject the offer.The total amount available is $50 if agreement is reached but both players get nothing if the
3.3 Charity events often use silent auctions. A donated item, such as a date with a movie star (Colin Firth and Scarlett Johansson in 2008) or a former president (Bill Clinton in 2013), is put up for bid. In a silent auction, bidders write down bids and submit them. Some silent auctions use secret
3.2 At the end of performances of his Broadway play“Cyrano de Bergerac,” Kevin Kline, who starred as Cyrano, the cavalier poet with a huge nose, auctioned his prosthetic proboscis, which he and his co-star, Jennifer Garner, autographed (http://www.nytimes.com/2007/12/09/business/09suits.html)
3.1 To try to maximize her commission, a real estate agent decides to sell a property in a very active market using a second-price sealed-bid auction. The market price of comparable properties that have sold recently is €400,000. Suppose that three bidders—Aron, Ela, and Mila—value the
2.13 David received a parking ticket but feels he did not deserve it! He can either pay it or go to court to contest it. In making his decision, he considers the amount of the ticket (worth 1 point), the time and effort required to contest it (worth 2 points), and how he feels about paying it
2.12 Due to learning by doing (Chapter 7), the more that an incumbent firm produces in the first period, the lower its marginal cost in the second period. If a potential entrant expects the incumbent to produce a large quantity in the second period, it does not enter. Draw a game tree to illustrate
*2.10 Suppose that an incumbent can commit to producing a large quantity of output before the potential entrant decides whether to enter. The incumbent chooses whether to commit to produce a small quantity or a large quantity. The rival then decides whether to enter. If the incumbent commits to the
*2.9 A monopoly manufacturing plant currently uses many workers to pack its product into boxes. It can replace these workers with an expensive set of robotic arms. Although the robotic arms raise the monopoly’s fixed cost substantially, they lower its marginal cost because it no longer has to
2.8 Levi Strauss and Wrangler are planning new generation jeans and must decide on the colors for their products. The possible colors are white, black, and violet. The payoff to each firm depends on the color it chooses and the color chosen by its rival, as the profit matrix shows:a. Given that the
2.7 A thug wants the contents of a safe and is threatening the owner, the only person who knows the code, to open the safe. “I will kill you if you don’t open the safe, and let you live if you do.” Should the information holder believe the threat and open the safe? The table shows the value
2.6 Two firms operate in a market. Solve for the Stackelberg subgame-perfect Nash equilibrium for this duopoly given the following game tree. Is the joint-profit maximizing outcome the outcome of this game?
2.5 In Solved Problem 13.2, suppose that Mimi can move first. What are the equilibria, and why? Now repeat your analysis if Jeff can move first.
2.4 A small tourist town has two Italian restaurants, Romano’s and Giardino’s. Normally both restaurants prosper with no advertising. Romano’s could take some of Giardino’s customers by running radio ads and Giardino’s could do the same thing. The one-month profit matrix (showing payoffs
*2.3 The airlines play the game in Table 13.1 repeatedly.What happens if the players know the game will last five periods? What happens if they repeat the game indefinitely but one or both firms care only about current profit?
2.2 Jagtar and Ravi both grow mangoes, which they sell in the same local market. They are deciding whether to pick 5 baskets worth of mangoes or 10 baskets, and have the following profit matrix:.a. What is the Nash equilibrium if both individuals make their decisions simultaneously?b. Does your
2.1 In a repeated game, how does the outcome differ if firms know that the game will be (a) repeated indefinitely, (b) repeated a known, finite number of times, (c) repeated a finite number of times but the firms are unsure as to which period will be the last period?
1.17 In the Application “Strategic Advertising,” would the cola advertising or cigarette advertising game be an example of a prisoners’ dilemma game?
1.16 The 100-meter Olympic gold medalist and the 200-meter Olympic gold medalist have agreed to a 150-meter duel. Before the race, each athlete decides whether to improve his performance by taking anabolic steroids. Each athlete’s payoff is 20 from winning the race, 10 from tying, and 0 from
1.15 Suppose that you and a friend play a matching pennies game in which each of you uncovers a penny.If both pennies show heads or both show tails, you keep both. If one shows heads and the other shows tails, your friend keeps them. Show the payoff matrix. What, if any, is the pure-strategy Nash
1.14 In the novel and film The Princess Bride, the villain Vizzini kidnaps the princess. In an attempt to rescue her, the hero, Westley, challenges Vizzini to a battle of wits. Consider this variation on the actual plot. (I do not want to reveal the story.) In the battle, Westley puts two identical
1.13 Modify the payoff matrix in the game of chicken in Exercise 1.12 so that the payoff is -2 if neither driver swerves. How does the equilibrium change? M
1.12 Eva and Ethan love attending sports events, especially when they go together. However, Eva prefers watching field hockey while Ethan would rather go to a cricket match. If they go together, the payoff is higher for the person who favors the sports event more (payoff = 3), and less for the
1.11 Suppose that Panasonic and LG are the only two firms that can produce a new type of holographic TV. The payoff matrix shows the firms’ profits (in millions of dollars):a. If both firms move simultaneously, does either firm have a dominant strategy? Explain.b. What are the Nash equilibria
1.10 Takashi Hashiyama, president of the Japanese electronics firm Maspro Denkoh Corporation, was torn between commissioning Christie’s or Sotheby’s to auction the company’s $20 million art collection, which included a van Gogh, a Cézanne, and an early Picasso (Carol Vogel, “Rock, Paper,
1.9 In the battle of the sexes game, the husband likes to go to the mountains on vacation, and the wife prefers the ocean, but they both prefer to take their vacations together.
*1.8 Suppose that Toyota and GM are considering entering a new market for self-driving automobiles and that their profits (in millions of dollars) from entering or staying out of the market are If the firms make their decisions simultaneously, which firms enter? How would your answer change if the
*1.7 What is the mixed-strategy Nash equilibrium for the game in Exercise 1.6? M
1.6 Suppose that two firms face the following payoff matrix:Given these payoffs, Firm 2 wants to match Firm 1’s price, but Firm 1 does not want to match Firm 2’s price. What, if any, are the pure-strategy Nash equilibria of this game?
1.5 Ambi wants her daughter, Aasa, to succeed at school.She decides to reward Aasa if her grades are above 90% of her class. If it is not, then Aasa will not be rewarded. The payoff matrix is If they choose their actions simultaneously, does either Ambi or Aasa have a dominant strategy in the
1.4 Suppose Procter & Gamble (PG) and Johnson & Johnson (JNJ) are simultaneously considering new advertising campaigns. Each firm may choose a high, medium, or low level of advertising. What are each firm’s best responses to its rival’s strategies? Does either firm have a dominant strategy?
1.2 Show that advertising is a dominant strategy for both firms in both panels of Table 13.3. Explain why that set of strategies is a Nash equilibrium.*1.3 Two firms must simultaneously decide which quality to manufacture. The profit matrix (in tens of thousands of euros) is?
*1.1 Show the payoff matrix and explain the reasoning in the prisoners’ dilemma example where Larry and Duncan, possible criminals, will get one year in prison if neither talks; if one talks, one goes free and the other gets five years; and if both talk, both get two years. (Note: The payoffs are
8.2 In the Challenge Solution, did the sales method achieve the same group-price-discrimination outcome that Heinz would achieve if it could set separate prices for loyal customers and for switchers?Why or why not?.
7.5 Use a diagram similar to Figure 12.7 to illustrate the effect of social media on the demand for Super Bowl commercials. (Hint: See the Application “Super Bowl Commercials.”)
7.4 For every dollar spent on advertising pharmaceuticals, revenue increases by about $4.20 (CNN, December 17, 2004). If this number is accurate and the firms are operating rationally, what (if anything)can we infer about marginal production and distribution costs? M
7.3 What is the monopoly’s profit-maximizing output, Q, and level of advertising, A, if it faces a demand curve of p = a - bQ + cAα, its constant marginal cost of producing output is m, and the cost of a unit of advertising is $1? (Hint: See Solved Problem 12.4.) M
6.1 A monopoly sells two products, of which consumers want only one. Assuming that it can prevent resale, can the monopoly increase its profit by bundling them, forcing consumers to buy both goods? Explain.
5.1 Using math, show why two-part pricing causes customers who purchase few units to pay more per unit than customers who buy more units. M
3.14 Does a monopoly’s ability to price discriminate between two groups of consumers depend on its marginal cost curve? Why or why not? [Consider two cases: (a) the marginal cost is so high that the monopoly is uninterested in selling to one group;
3.13 According to a report from the Foundation for Taxpayer and Consumer Rights, gasoline costs twice as much in Europe than in the United States because taxes are higher in Europe. However, the amount per gallon net of taxes that U.S. consumers pay is higher than that paid by Europeans. The report
3.12 Show that the equilibrium elasticities in the two countries must be equal in Solved Problem 12.3. M
*3.11 A monopoly sells to n1 consumers in Country 1 and n2 in Country 2, where each person in Country 1 has a constant elasticity demand function of q1 = pe1 and every person in Country 2 has a demand function of q2 = pe2. Thus, the country demand functions are Q1 = n1pe1 and Q2 = n2pe2. The
3.10 How would the analysis in Solved Problem 12.2 change if m = 7 or if m = 4? (Hint: Where m = 4, the marginal cost curve crosses the MR curve three times—if we include the vertical section. The singleprice monopoly will choose one of these three points where its profit is maximized.)
3.9 A monopoly sells its good in the United States, where the elasticity of demand is -2, and in Japan, where the elasticity of demand is -5. Its marginal cost is 10. At what price does the monopoly sell its good in each country if resale is impossible? M
*3.8 Warner Home Entertainment sold the Harry Potter and the Prisoner of Azkaban two-DVD movie set in China for about $3, which was only one-fifth the U.S. price, and sold about 100,000 units. The price was extremely low in China because Chinese consumers are less wealthy and because
3.7 Universal Studios sold the Mamma Mia! DVD around the world. Universal charged $21.40 in Canada and $32 in Japan—more than the $20 it charged in the United States. Given that Universal had a constant marginal cost of $1, determine what the elasticities of demand must be in Canada and in Japan
*3.6 A profit-maximizing monopoly produces a good with constant marginal cost, MC = 20, that it sells in two countries. The inverse linear demand curve is p1 = 60 - Q1 in Country 1 and p2 = 60 - 2Q2 in Country 2. What is the equilibrium price and quantity in each country if resale between the
*3.5 A patent gave Sony a legal monopoly to produce a robot dog called Aibo (“eye-BO”). The Chihuahuasized robot could sit, beg, chase balls, dance, and play an electronic tune. When Sony started selling the toy in July 1999, it announced that it would sell 3,000 Aibo robots in Japan for about
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