Liberty University Econ
213 Problem Set 4 solutions answers right
1. Monopolies can sometimes find
themselves in difficult financial situations that lead to losses. Suppose Mr. Burns’
power company has a monopoly for providing electricity in Springfield. His
costs of upkeep are so high that he is consistently losing money.
a.) Show this outcome in a completely
labeled graph. Clearly identify all parts of your graph, including the best
price and output for the firm as well as the losses.
Now,
answer the following:
b.) What happens to the market output when
Mr. Burns raises the price he charges?
c.) Will this stop his losses? Why or why
not?
2. Assume the following game is played
one time only. Based on the information in the payoff matrix below, PNC Bank
and Citizens Bank are considering an implicit collusive agreement on interest
rates. Payoffs to the two firms are represented in terms of profits in
thousands of dollars.
Citizens
Bank Collude: Raise Rates Defect: Keep Rates Where They
Are PNC Collude: Raise Rates
(900,
600) (700, 800) Defect: Keep Rates Where They Are (1100,
300) (800, 400)
a.) Does PNC have a dominant strategy?
What is it?
b.) Does Citizens have a dominant
strategy? What is it?
c.) Does the result of your answer change
if the game is played an infinite number of times? Why or why not? Properly use
game theoretic terminology in your answer.
3. What is the profit-maximizing output
of the monopolist shown below? ___________
What
price do they set? _______________________
What
is the monopolist’s markup over the competitive price? ________________
Why
will this price not fall?
4. Levi’s has an advertising slogan:
“Quality never goes out of style.” Consumers can buy other kinds of jeans,
including off-brands. The manufacturers of off-brand, or generic, jeans do not
advertise. Assume that the average total cost of producing Levi’s and generic
jeans is the same.
a.) Create a graph showing the price
(labeled as P1) that Levi’s changes. Also, identify the markup.
b.) How does Levi’s advertising affect
their profits?
c.) Do Levi’s or the generic producers
have a stronger incentive to maintain quality control? Why?
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