Problem 1
'Since a firm's optimal behaviour depends on how it believes that its rival(s) will react, there are as many output decisions, and hence equilibriums, as there are guesses about what rivals will do.' How do economists try to narrow down the assumptions that firms make about their rivals?
Problem 3
A good-natured parent knows that children sometimes need punishing but also knows that, when it comes to the crunch, the child will be let off with a warning. Can the parent undertake any pre-commitment to make the threat of punishment credible?
Problem 5
Why are these statements wrong? (a) Competitive firms should get together to restrict output and drive up the price. (b) Firms would not advertise unless they expected advertising to increase sales. (c) A firm in a monopolistically competitive market faces a horizontal demand curve for its product.
Problem 10
Consider a market with two firms, 1 and 2 , producing a homogeneous good. The market demand is \(P=100-3\left(Q_{1}+Q_{2}\right)\), where \(Q_{1}\) is the quantity produced by firm 1 and \(Q_{2}\) is the quantity produced by firm 2 . The total cost for firm 1 is \(T C_{1}=\) \(40 Q_{1}\), while the total cost for firm 2 is \(T C_{2}=40 Q_{2}\). Each firm behaves like a competitive firm. a) What is the equilibrium quantity in the market? b) Suppose both firms exhibit Cournot behaviour. Given that their reaction functions are \(Q_{1}=20-2 Q_{2}\) and \(Q_{2}=20-2 Q_{1}\), how would their output change compared to \((\mathrm{a}) ?\)
Problem 11
Vehicle repairers sometimes suggest that mechanics should be licensed so that repairs are done only by qualified people. Some economists argue that customers can always ask whether a mechanic was trained at a reputable institution without needing to see any licence. (a) Evaluate the arguments for and against licensing car mechanics. (b) How would licensing affect the market for mechanics? (c) Are the arguments the same for licensing doctors?
Problem 12
'Globalization, by increasing the size of the market, reduces market power of individual firms and the need to address strategic interactions.' 'Globalization makes mergers more attractive and thus enhances worries about market power.' Is either of these views correct? Or are both correct?
Problem 13
Two identical firms, 1 and 2, compete on quantities. The reaction function of firm 1 is \(\mathrm{Q}_{1}=15-1 / 2 \mathrm{Q}_{2}\), while for firm 2 we have \(\mathrm{Q}_{2}=15-1 / 2 \mathrm{Q}_{1}\), In the table below we have the total quantity produced in the market: $$ \begin{array}{|l|l|l|l|l|l|l|l|l|l|} \hline Q 1+Q 2 & 2 & 6 & 10 & 14 & 18 & 22 & 26 & 30 & 34 \\ \hline \end{array} $$ Using the fact that both firms must produce the same quantity, plot the reaction functions of the two firms in a graph. How is the equilibrium quantity determined?
Problem 14
Consider a market with two firms, 1 and 2 producing a homogeneous good. The market demand is \(P=130-2\left(Q_{1}-Q_{2}\right)\), where \(Q_{1}\) is the quantity produced by firm 1 and \(Q_{2}\) is the quantity produced by firm 2 . The total cost for firm 1 is \(T C_{1}=\) \(10 Q_{1}\), while the total cost for firm 2 is \(T C_{2}=10 Q_{2}\). Each firm chooses the quantity to best maximize profits. (a) From the condition \(M R_{1}=M C_{1}\), find the reaction function of firm 1 , and from \(M R_{2}=M C_{2}\), find the reaction function of firm \(2 .\) (b) Find the equilibrium quantity produced by each firm by solving the system of the two reaction functions you found in (a). Sketch your solution graphically. (c) Find the equilibrium price and then find the profit of each firm.
