1. Suppose that a monopolistically competitive firm must build a production facility in order to produce a product. The fixed cost of this facility is FC = $24. Also, the firm has constant marginal cost, MC = $3. Demand for the product that the firm produces is given by P = 27-3Q.
a) Fill in the table below. If any of your values have decimals, you may round to only one numeral after the decimal (nearest 10th of a dollar).
| Quantity of Output | Price | Total Cost | Average Total Cost | Total Revenue | Profits |
| 1 |
| 2 |
| 3 |
| 4 |
| 5 |
| 6 |
| 7 |
| 8 |
| 9 |
b) How much output will this firm produce if it maximizes profit?
c) What price should this firm charge if it wants to maximize profit?
2. Carefully explain what will happen as we move from the short run to a long run equilibrium in a monopolistically competitive industry if firms are making a positive profit in the short run. Your explanation should clearly state what will happen to the demand curve facing an individual firm and the reason why this happens.
3. Suppose that two players are playing the following game. Player A can choose either Top or Bottom, and Player B can choose either Left or Right. The payoffs are given in the following table, where the number on the left is the payoff to Player A, and the number on the right is the payoff to Player B:
| Player B |
Player A | Left | Right |
| Top | 2 5 | 1 4 |
| Bottom | 0 1 | 3 8 |
A) Does player A have a dominant strategy, and if so what is it?
B) Does player B have a dominant strategy and if so what is it?
C) For each of the following say True if the strategy combination is a Nash equilibrium, and False if it is not a Nash equilibrium:
i) Player A plays Top and Player B plays Left
ii) Player A plays Bottom and Player B plays Left
iii) Player A plays Top and Player B plays Right
iv) Player A plays Bottom and Player B plays Right
D) If each player plays her maximin strategy what will be the outcome of the game? (Give your answer in terms of the strategies each player chooses—for example, “Player A plays Bottom and Player B plays Right”)
E) Now suppose the same game is played with the exception that Player A moves first and Player B moves second. Draw the game tree associated with this situation. Using the backward induction method discussed in the online class notes, what will be the outcome of the game?
4. Suppose there are 12 firms in an industry. The percentage of total sales is given in the following table:
| Firm | Percentage of total sales |
| 1 | 16 |
| 2 | 14 |
| 3 | 12 |
| 4 | 12 |
| 5 | 10 |
| 6 | 8 |
| 7 | 6 |
| 8 | 6 |
| 9 | 5 |
| 10 | 4 |
| 11 | 4 |
| 12 | 3 |
A) Calculate the HHI for this industry.
B) If firms 6 and 7 decide to merge, would this merger be challenged by the FTC? Why or why not?
5.
| Quantity of the public good | Willingness to pay of person 1 | Willingness to pay of person 2 | Society's willingness to pay |
| 1 | 65 | 35 |
| 2 | 55 | 25 |
| 3 | 45 | 15 |
| 4 | 35 | 5 |
| 5 | 20 | 0 |
The table above shows the willingness to pay for various units of a public good for the only two individuals in a society. The willingness to pay is the willingness to pay per unit of the public good. For example, person 1 is willing to pay $55 per unit of the public good for two units. To put it another way, if the price to person 1 of two units of the public good is $55, then person 1 would want to purchase 2 units of the public good. (If you were to plot person 1’s willingness to pay for the public good with quantity on the horizontal axis and willingness to pay on the vertical axis, it would look like a demand curve, and that is exactly what it is.) Fill in the column “Society’s willingness to pay.” Then draw a graph of society’s demand for the public good.
6. Bob and Dexter share a dorm room. Bob is a smoker but Dexter does not smoke. There are no laws that prohibit smoking in the dorm rooms. The benefit of smoking is worth $250 to Bob, but the smoke imposes a $500 cost on Dexter. How might the Coase theorem be used to achieve an efficient outcome in this situation? In your answer, be sure to define the Coase theorem, and the conditions under which the Coase theorem may work.
7. What are the differences between public and private goods? Give an example of each type of good.
8. Suppose you are hired by the Martin guitar company as an economic consultant. You estimate the demand for Martin guitars to be Q = 9,000 – 6P.
a) Suppose the supply of Martin Guitars is given by Q = XXXXXXXXXX9P. What is the
equilibrium price and quantity of Martin guitars?
b) What is the price elasticity of demand at the equilibrium price and quantity?
c) What is the price elasticity of supply at the equilibrium price and quantity?
For the next three questions, suppose a per-unit excise tax of $90 per guitar is levied on the consumers. d) What price will consumers pay after the tax is levied?
e) What proportion of the tax will be paid by the suppliers of Martin guitars?
f) How many guitars will be sold after the tax is imposed?
g) How much consumer surplus do consumers get after the tax?
h) What is the deadweight loss created by this tax?