1.Suppose you are given the following information about a particular industry:
QD = 6500 – 100P Market demand
QS = 1200P Market supply
C(q) = 722 + q2/200 Firm total cost function
MC(q) = 2q/200 Firm marginal cost function
Assume that all firms are identical and that the market is characterized by the pure competition.
a. Find the equilibrium price, the equilibrium quantity, the output supplied by the firm, and the profit of each firm.
b. Would you expect to see entry into or exit from the industry in the long run? Explain. What effect will entry or exit have on market equilibrium?
c. What is the lowest price at which each firm would sell its output in the long run? Is profit positive, negative, or zero at this price? Explain.
d. What is the lowest price at which each firm would sell its output in the short run? Is profit positive, negative, or zero at this price? Explain.
2.Two major networks are competing for viewer ratings in the 8:00 -9:00pm and 9:00-10:00pm slots on a given weeknight. Each has two shows to fill this time period and is juggling its lineup. Each can choose to put its “bigger” show first or to place it second in the 9:00-10:00pm slot. The combination of decisions leads to the following “rating points” results:
|
Network 1
|
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Network 2
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|
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First
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Second
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First
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20, 30
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18, 18
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Second
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15, 15
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30, 10
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a. Find the Nash equilibria for this game, assuming that both networks make their decisions at the same time.
b. If each network is risk - averse and uses a maximin strategy, what will be the resulting equilibrium?
c. What will be the equilibrium if Network 1 makes its selection first? If Network 2 goes first?
d. Suppose the network managers meet to coordinate schedules and Network 1 promises to schedule its big show first. Is this promise credible? What would be the likely outcome?
3.Bookworm and Easyread are both publishers of popular novels.
a. Assume that demand for Bookworm novels is elastic.
- Explain the meaning of the underlined term.
- Outline one important factor that you feel has helped to determine the size of this own price elasticity.
- How would a fall in Bookworm’s price affect their total revenue?
b. When the price of Easyread novels increased from $20 to $23, Bookworm’s sales increased from 105,000 to 120,000 novels. Calculate the arc cross price elasticity. Are the two brands of novels close substitutes? Explain.
c. An increase in average weekly earnings from $290 to $310 caused Bookworm’s sales to increase from 120,000 to 130,000 novels. Calculate and interpret the income elasticity.
4.The following production function relates to a small firm that incurs fixed costs of $100 and labour costs of $10 per hour.
Labour Hours (L) Total Product (Q)
1 8
2 24
3 39
4 50
5 56
6 59
7 61
8 62
a. For each of the output levels shown above calculate:
• average and marginal product
• total variable and total cost
• average variable, average total and marginal cost
b. For the above data, over which output range do we observe diminishing returns?