Problem Set # 3

This problem set is due Thursday, April 25, at the beginning of the class period. Problem sets done on notebook paper or unstapled will not be accepted. Late problem sets are unacceptable also.

1. Minnie's Mineral Springs, a monopoly, faces the following demand schedule for bottled mineral water:

a) Calculate Minnie's total revenue schedule.

b) Calculate its marginal revenue schedule.

c) Between which prices is the elasticity of demand equal to one?

Minnie's has the following total cost:

Calculate the profit-maximizing levels of

d) Output

e) Price

f) Profit

2. Consider two oligopolists, Tetraty University and Lentil University, with each choosing between a "low" ($10,000 per year) and a "high" ($15,000 per year) tuition levels. If both Universities charge $15,000, each of them loses $15 million per year. If Tetraty U. charges the "low" tuition of $10,000, while Lentil U. keeps tuition at its "high" level, then Tetraty U. only loses 5 million while Lentil U. loses 20 million. If Lentil U. charges the "low" tuition of $10,000, while Tetraty U. keeps tuition at its "high" level, then Lentil U. only loses 5 million while Tetraty U. loses 20 million. Finally, if both Universities charge $10,000, each of them loses $18 million per year.

a) Provide the payoff table for the tuition decision of Tetraty and Lentil Universities.

b) If Tetraty U. does not know what Lentil U. tuition will be, what is Tetraty U.'s optimal tuition?

c) If Lentil U. does not know what Tetraty U. tuition will be, what is Lentil U.'s optimal tuition?

d) What is the Cournot-Nash solution for this problem? Explain.

e) What is the tacit collusive solution for this problem? Explain.

3. Assume that the market structure of the bicycle industry is of the "Dominant-Firm" Oligopoly type. The President of "Bitalo", the largest and dominant firm in the bicycle market, gives you the following information:

where: P = Price; Qd = Market demand; Qss = Supply of small firms in the industry; and TC = Total cost of "Bitalo".

a) Maria Grassiani, President of "Bitalo", tells you that her company has decided to behave as a "Dominant-Firm" Oligopolist. She asks you to find her profit maximizing output and price.

b) How much profit is "Bitalo" going to make at the level of output that you suggested in part a)?

c) What is the market share of "Bitalo" if it decides to produce at its profit maximizing output?

d) If the bicycle industry has 11 companies, "Bitalo" and 10 small identical firms, what is the value of the Herfindahl Index for this industry when "Bitalo" maximizes profits as a "Dominant-Firm" Oligopolist? What is the value of the 4-Firm Concentration Ratio?

4. Sony is a Compact Disc Player producer in a monopolistically competitive industry.

a) In January 1996, Sony is making zero economic profits (or a "normal rate of return"). Draw a diagram illustrating the profit maximizing output of Sony in January 1996.

b) When a consultant is hired, she recommends a large advertising campaign to let the public know of all the "virtues" of Sony's compact disc players. Illustrate with the use of a diagram the effect that a successful campaign would have on Sony's profit maximizing output and profits.

c) What do you think the response of other compact disc producers to the new strategy followed by Sony would be?

d) Illustrate with the use of a diagram, the long run consequences of the actions taken by competitors on the profit maximizing output and profits of Sony.

5. Suppose that the following data represent the demand and supply schedules in a perfectly competitive industry.

a) What are the equilibrium price and quantity in this perfectly competitive market?

b) Suppose that a perfect cartel forms in this industry. What are the equilibrium price and quantity in this industry once the cartel starts functioning?