The manager of a local monopoly estimates that the elasticity of demand for its product is constant and equal to -3. The firm’s marginal cost is constant at $15 per unit.
a. Express the firm’s marginal revenue as a function of its price.
Instruction: Round your response to 2 decimal places.
MR = x P
b. Determine the profit-maximizing price.
Instruction: Use the rounded value calculated above and round your response to 2 decimal places.
Consider a Bertrand oligopoly consisting of four firms that produce an identical product at a marginal cost of $200. The inverse market demand for this product is P = 400 -4Q.
a. Determine the equilibrium level of output in the market.
b. Determine the equilibrium market price.
c. Determine the profits of each firm.
Use the following normal-form game to answer the questions below.
Strategy C D
Player 1 A 70, 70 110, 40
B 40, 110 75, 75
a. Identify the one-shot Nash equilibrium.
b. Suppose the players know this game will be repeated exactly three times. Can they achieve payoffs that are better than the one-shot Nash equilibrium?
c. Suppose this game is infinitely repeated and the interest rate is 4 percent. Can the players achieve payoffs that are better than the one-shot Nash equilibrium?
d. Suppose the players do not know exactly how many times this game will be repeated, but they do know that the probability the game will end after a given play is θ. If θ is sufficiently low, can players earn more than they could in the one-shot Nash equilibrium?
You are the manager of a monopoly that sells a product to two groups of consumers in different parts of the country. Group 1’s elasticity of demand is -3, while group 2’s is -4. Your marginal cost of producing the product is $20.
a. Determine your optimal markups and prices under third-degree price discrimination.
Instruction: Round your answers to two decimal places.
Markup for group 1:
Price for group 1: $
Markup for group 2:
Price for group 2: $
b. Which of the following are necessary conditions for third-degree price discrimination to enhance profits.
Instructions: You may select more than one answer. Click the box with a check mark for the correct answers and click twice to empty the box for the wrong answers. You must click to select or deselect each option in order to receive full credit.
At least one group has elasticity of demand greater than 1 in absolute value.
There are two different groups with different (and identifiable) elasticities of demand.
At least one group has elasticity of demand less than one in absolute value.
We are able to prevent resale between the groups.
A risk-neutral consumer is deciding whether to purchase a homogeneous product from one of two firms. One firm produces an unreliable product and the other a reliable product. At the time of the sale, the consumer is unable to distinguish between the two firms’ products. From the consumer’s perspective, there is an equal chance that a given firm’s product is reliable or unreliable. The maximum amount this consumer will pay for an unreliable product is $0, while she will pay $50 for a reliable product.
a. Given this uncertainty, what is the most this consumer will pay to purchase one unit of this product?
b. How much will this consumer be willing to pay for the product if the firm offering the reliable product includes a warranty that will protect the consumer?