Econ 1201 Summer 2018 - - - Assignment #4

Econ 1201

Summer 2018 - - - Assignment #4

Due: Friday, August 17th Before 10:00 p.m.

Assignments must be typed, with all calculations shown; diagrams can be hand drawn - - - insert your diagrams in the appropriate sections of your document.

Hand written assignments are notaccepted.

Assignments must besubmitted in the appropriate Dropbox on Brightspace either as a Wordor pdf file. Email attachments are not accepted.

Note: Make sure your name and student number are included on your assignment.

Question 1.Since enrolled in this course and the knowledge acquired you have decided to start up a small consulting firm Economic Solutions. You receive contracts from four independent monopoly firms seeking you input as to how to maximize profits. They have provided you with the information contained in the table below, which unfortunately is incomplete. Nonetheless, your knowledge enables you to provide recommendations to each of these clients.

Select one of the following recommendations for each client and briefly explain why they should implement your recommendation. Your advice to each firm is worth 2 marks.

1. Do not change from your current level of production.

1. You should increase your level of output.

1. You should reduce your production levels.

1. In the short run, it is best to shut down the business.

1. There is something wrong with the calculations you have provided, please recheck and resubmit your numbers.

Firm	Price	MR	TR	Q	TC	MC	ATC	AVC	Recommendation
Always Right	3.9	3.0		2,000	7,400	2.9		3.24
Best for Everything	5.9		44,000	10,000		5.9	4.74	4.24
Consumer Delight		9.0		4,000		9	11.9	10.74
Downright Perfect	35.9	37.9		5,000		37.9	35.9

Question 2. The information in table below contains demand and cost data for a profit maximizing monopolist.

Quantity	Price	Total Revenue	Marginal Revenue	Total Cost	Marginal Cost
0	$34			$30
1	$32			$36
2	$30			$46
3	$28			$50
4	$26			$54
5	$24			$56
6	$22			$68
7	$20			$82
8	$18			$100
9	$16			$128
10	$14			$160

a. What is the profit maximizing output for the monopolist? [2 marks]

b. What price will the firm charge? [2 marks]

c. What profit will the monopolist earn? [2 marks]

Question 3.

a. Briefly explain why a profit-maximizing monopolist leads to a deadweight loss. [2 marks]

b. Do you agree or disagree with the following statement: “Because a monopolist is the only firm, it can charge whatever price it wants?” [2 marks]

Question 4. Cheema Culinary and Surour Delicious are two independent firms operating in the after-midnight take-out (away) food service market in the city. If they decide to cooperate they can charge the same price ($6) for a slice of pizza or compete and charge $3 per slice in hopes of increasing their lower market share. The payoff matrix, nightly profits, is featured below.

a. Do either of these firms have a dominant strategy? Explain. [2 marks]

b. Should the firms collude? Explain the outcome. [2 marks]

c. Has either firm an incentive to cheat? Why? [2 marks]

n

d. What is the Nash equilibrium outcome in this game? Explain. [2 marks]

	CheemaCulinary
Charges $6 for a pizza slice	Charges $3 for a pizza slice
Surour Delicious	Charges $6 for a pizza slice	Profit: $3,000 Profit: $3,000	Profit: $5,000 Profit: $1,000
Charges $ 4 for a pizza slice	Profit: $1,000 Profit: $5,000	Profit: $1,500 Profit: $1,500