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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?