Description
1. An industry with two firms has the following inverse market demand:
P(Q) = 40 – Q
Firm 1 is the Stackelberg (quantity) leader and firm 2 is the follower.
Both firms have the cost function: ci(qi) = 10qi
What will be the output of each firm
2. Suppose there is a monopolist with the following inverse demand function: p(q) = 100 – q
Costs are equal to: c(q) = 20q.
a. What is the deadweight loss in a monopoly setting relative to a competitive market? Explain your
answer graphically and provide a numeric answer.
b. If the monopolist decided to employ a two-part tariff (i.e. charge an ‘admission fee’ and a per unit
price), what would be the one-time fee and what would be the price per unit? There is no need to
draw another graph, but show your work/calculations
3.Suppose two firms are facing the following demands for the products they are selling.
ଵ = 400 − 4 ଵ + 2 ଶ
ଶ = 240 − 3 ଶ + 1.5 ଵ
The firms are competing by setting price simultaneously and costs are equal to 0.
What is the reaction function of each firm? What are the equilibrium prices?
