Question C1:

1.

1.1 Use a graph to demonstrate the circumstances that would prevail in a perfectly competitive market where firms are experiencing economic losses.

1.2 Identify costs, revenue, and the economic losses on your graph.

1.3 Using your graph, determine whether this firm will shut down in the short run or choose to remain in the market. Explain your answer.

2.

- Complete the following total for marginal cost.

- How many units of output should this monopoly firm produce in order to maximize its profits?

- What is the market price of the product, and what is the maximum profit?

Question C2. The graph below shows the demand curve (D), marginal revenue curve (MR), mar- ginal cost curve (MC), average total cost curve (ATC), and long-run average total cost curve (LRATC) for a monopolist.

Using the numbers given in the graph, identify each of the following for the profit-maximizing monopolist.

(a) The quantity produced

(b) The price

(c) The allocatively efficient quantity

(d) At the profit-maximizing quantity from part (a) is the monopolist experiencing economies of scale? Explain.

Now assume that the monopolist produces 10 units. Using the numbers given in the graph, calculate each of the following. Show your work.

(e) The monopolist's economic profit

(f) The consumer surplus

(g) The deadweight loss

(h) At what quantity is demand unit elastic?

Suppose the monopolist perfectly price discriminates and chooses the quantity that maximizes profit. Determine the dollar value of each of the following.

(i) The monopolist's profit

(j) The consumer surplus

Question C3 Question C3A: Prisoner's dilemma

Question a1: What is prisoner's dilemma? Explain the idea/dilemma in terms of the following story?

Bonnie and Clyde have been captured. The police have enough evidence to convict them on a weapons charge (sentence = 1 year), but suspect that they have been involved in a bank robbery. Because they lack hard evidence in the crime, they need at least one of them to confess.

The police lock the two in separate rooms and offer each of them a deal: "We can lock you up for 1 year. However, if you confess to the bank robbery and implicate your partner, we will give you immunity. You will go free and your partner will get 20 years in jail. If you both confess, we won't need your testimony and will avoid the cost of a trial, so you will both get 8 years."

Questions:

a2. What is Bonnie's dominant strategy and why? Explain (2 marks) a3. What is Clyde's dominant strategy and why? Explain.

a4. Would both the better off if they had remained silent? Explain. What leads them to break silence leading to an inferior outcome?