42009 Introductory Economics Fall 2022

Answers to Macro2
1.
a. i = 4 percent, P = 1/2
b. i = 5 percent, P = 1

2. Percentage Change in M + Percentage Change in V = Percentage Change in P + Percentage

Change in Y . Here, Percentage Change in V = 0. Percentage Change in M – Percentage Change
in P = Percentage Change in Y. Given that the GDP growth rate is 8 percent, the change in real
money balances is 8 percent as well.

3.
a. 300 = 400 – 20r → r= 5 percent
b. 200
c. The trade surplus will be 100.

4.
a. No. 400 – 20(10) = I = 200.
b. Yes. It decreases by 100.
c. Yes. It decreases by 100.
d. It will rise.

5. a.

b. The fiscal expansion in the rest of the world would raise the world interest rate and low
domestic investment. As a result, the U.S. exchange rate will depreciate, and the trade
balance will move toward surplus.
 42009 Introductory Economics Fall 2022
Macro Self-test
1. Assume that total output consists of 4 apples and 6 oranges and that apples cost $1 each and oranges cost
$0.50 each. In this case, the value of GDP is:
a. 10 pieces of fruit.
b. $7.
c. $8.
d. $10.

2. If nominal GDP increased by 5 percent and the GDP deflator increased by 3 percent, then real GDP ______
by ______ percent.
a. increased; 2
b. decreased; 2
c. increased; 8
d. decreased; 8

3. GNP equals GDP ______ income earned domestically by foreigners ______ income that nationals earn
abroad.
a. plus; plus
b. minus; minus
c. minus; plus
d. plus; minus

4. Assume that the consumption function is given by C = 150 + 0.85(Y – T), the tax function is given by T = t0 +
t1Y, and Y is 5,000. If t1 decreases from 0.3 to 0.2, then consumption increases by:
a. 85.
b. 425.
c. 500.
d. 525.

5. Assume that the investment function is given by I = 1,000 – 30r, where r is the real rate of interest (in
percent). Assume further that the nominal rate of interest is 10 percent and the inflation rate is 2 percent.
According to the investment function, investment will be:
a. 240.
b. 700.
c. 760.
d. 970.

6. In the classical model with fixed income, if the interest rate is too high, then investment is too ______, and
the demand for output ______ the supply.
a. high; exceeds
b. high; falls short of
c. low; exceeds
d. low; falls short of
Copyright Macmillan Learning. Powered by Cognero. Page 1
7. Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6Y. In
addition, assume G=0. In this case, equilibrium investment is:
a. 1,500.
b. 2,000.
c. 2,500.
d. 3,000.

8. All of the following are considered major functions of money except as a:

a. medium of exchange.
b. way to display wealth.
c. unit of account.
d. store of value.

9. To increase the money supply, the central bank:

a. buys government bonds.
b. sells government bonds.
c. buys corporate stocks.
d. sells corporate stocks.

10. The money supply will decrease if the:

a. monetary base increases.
b. currency–deposit ratio increases.
c. discount rate decreases.
d. reserve–deposit ratio decreases.

11. If the monetary base equals $400 billion, the currency–deposit ratio equals 0.5, and the reserve–deposit ratio
equals 0.1, then the money supply equals:
a. $200 billion.
b. $400 billion.
c. $800 billion.
d. $1,000 billion.

12. If the ratio of reserves to deposits (rr) increases, while the ratio of currency to deposits (cr) is constant and
the monetary base (B) is constant, then:
a. it cannot be determined whether the money supply increases or decreases.
b. the money supply increases.
c. the money supply decreases.
d. the money supply does not change.

13. If the number of employed workers equals 200 million and the number of unemployed workers equals 20
million, the unemployment rate equals ______ percent (rounded to the nearest percent).
a. 0
b. 9
c. 11
d. 20
Copyright Macmillan Learning. Powered by Cognero. Page 2
14. If the fraction of employed workers who lose their jobs each month (the rate of job separation) is 0.01 and
the fraction of the unemployed who find a job each month is 0.09 (the rate of job findings), then the natural rate
of unemployment is:
a. 1 percent.
b. 9 percent.
c. 10 percent.
d. about 11 percent.

15. Frictional unemployment is unemployment caused by:

a. wage rigidity.
b. minimum-wage legislation.
c. the time it takes workers to search for a job.
d. clashes between the motives of insiders and outsiders.

16. If there are 100 transactions in a year and the average value of each transaction is $10, then if there is $200
of money in the economy, transactions velocity is ______ times per year.
a. 0.2
b. 2
c. 5
d. 10

17. The quantity theory of money assumes that:

a. income is constant.
b. velocity is constant.
c. prices are constant.
d. the money supply is constant.

18. The opportunity cost of holding money is the:

a. nominal interest rate.
b. real interest rate.
c. federal funds rate.
d. prevailing Treasury bill rate.

19. Consider the money demand function that takes the form (M / P)d = Y / (4i), where M is the quantity of
money, P is the price level, Y is real output, and i is the nominal interest rate. What is the average velocity of
money in this economy?
a. i
b. 4
c. 1 / (4i)
d. 0.25

20. Variables expressed in terms of physical units or quantities are called ______ variables.
a. real
b. nominal
Copyright Macmillan Learning. Powered by Cognero. Page 3
 c. endogenous
d. exogenous

21. The theoretical separation of real and monetary variables is called:

a. the classical dichotomy.
b. monetary neutrality.
c. the Fisher effect.
d. the quantity theory of money.

22. The value of net exports is also the value of:

a. net investment.
b. net saving.
c. national saving.
d. the difference of national saving and domestic investment.

23. In a small open economy, if domestic investment exceeds domestic saving, then the extra investment will be
financed by:
a. borrowing from abroad.
b. borrowing from domestic banks.
c. the domestic government.
d. the World Bank.

24. If a graph is drawn with net exports on the horizontal axis and the real exchange rate on the vertical axis,
then the real exchange rate is determined by the intersection of the ______ net-exports schedule and the ______
line representing saving minus investment.
a. downward-sloping; vertical
b. upward-sloping; vertical
c. downward-sloping; upward-sloping
d. upward-sloping; downward-sloping

25. In a small open economy, if the world interest rate falls, then domestic investment will _____, and the real
exchange rate will _____, holding all else constant.
a. decrease; decrease
b. decrease; increase
c. increase; decrease
d. increase; increase

26. A depreciation of the real exchange rate in a small open economy could be the result of:
a. a domestic tax cut.
b. an increase in government spending.
c. a decrease in the world interest rate.
d. the expiration of an investment tax-credit provision.

27. Exhibit: Policies Influence Real Exchange Rate

Copyright Macmillan Learning. Powered by Cognero. Page 4

Which of the panels illustrates the impact of contractionary fiscal policies at home on the real exchange rate?
a. (A)
b. (B)
c. (C)
d. (D)

28. Exhibit: Policies Influence Real Exchange Rate

Copyright Macmillan Learning. Powered by Cognero. Page 5

Which of the panels illustrates the impact of an increase in household saving on the real exchange rate?
a. (A)
b. (B)
c. (C)
d. (D)

29. The percentage change in the nominal exchange rate equals the percentage change in the real exchange rate
plus the:
a. foreign inflation rate minus the domestic inflation rate.
b. domestic inflation rate minus the foreign inflation rate.
c. foreign exchange rate minus the domestic exchange rate.
d. domestic interest rate minus the foreign interest rate.

30. Holding other factors constant, legislation to cut taxes in an open economy will:
a. increase national saving and lead to a trade surplus.
b. increase national saving and lead to a trade deficit.
c. reduce national saving and lead to a trade surplus.
d. reduce national saving and lead to a trade deficit.

Copyright Macmillan Learning. Powered by Cognero. Page 6

Micro (Lecture 7-Lecture 10) Self Test Answers
1) A
2) B
3) B
4) D
5) A
6) A
7) C
8) C
9) A
10) A
11) D
12) D
13) C
14) D
15) D
16) D
17) A
18) D
19) A
20) D
21) C
22) A
23) C
24) B
25) D
26) C
27) D
28) A
29) C
30) A
31) B
32) B
33) A
34) D
35) D
36) C
37) C
38) A
39) D
40) D
42009 Introductory Economics

SELF TEST LECTURES 7-10

 1.

Which of the following is a profit-maximizing condition for a Cournot oligopolist?

 MR = MC.

 Q1 = Q2 = ... = Qn.

 P = MR.

 All of the statements associated with this question are correct.

 2.

When firm 1 enjoys a first-mover advantage in a Stackelberg duopoly, it will produce:

 more output and charge a lower price than firm 2.

 more output and charge the same price as firm 2.

 less output and charge the same price as firm 2.

 less output and charge a higher price than firm 2.

 3.

Two identical firms compete as a Cournot duopoly. The demand they face is P = 100 − 2Q. The cost
function for each firm is C(Q) = 4Q. The equilibrium output of each firm is:

 8.

 16.

 32.

 36.

[Link] 1/15
11/19/22, 5:19 PM Assignment Print View

 4.

Two identical firms compete as a Cournot duopoly. The demand they face is P = 100 − 2Q. The cost
function for each firm is C(Q) = 4Q. Each firm earns equilibrium profits of:

 $1,024.

 $2,048.

 $4,096.

 $512.

 5.

Two firms compete as a Stackelberg duopoly. The demand they face is P = 100 − 3Q. The cost
function for each firm is C(Q) = 4Q. The outputs of the two firms are:

 QL = 16; QF = 8.

 QL = 24; QF = 12.

 QL = 12; QF = 8.

 QL = 20; QF = 15.

 6.

Two firms compete as a Stackelberg duopoly. The demand they face is P = 100 − 3Q. The cost
function for each firm is C(Q) = 4Q. The profits of the two firms are:

πL = $384; πF = $192.

 πL = $192; πF = $91.

 πL = $56; πF = −$28.

 πL = $56; πF = $28.

[Link] 2/15
11/19/22, 5:19 PM Assignment Print View

 7.

Which would you expect to make the highest profits, other things equal?

 Bertrand oligopolist

 Cournot oligopolist

 Stackelberg leader

 Stackelberg follower

 8.

The Sweezy model of oligopoly reveals that:

 capacity constraints are not important in determining market performance.

 perfectly competitive prices can arise in markets with only a few firms.

 changes in marginal cost may not affect prices.

 All of the statements associated with this question are correct.

 9.

The market demand in a Bertrand duopoly is P = 15 − 4Q, and the marginal costs are $3. Fixed
costs are zero for both firms. Which of the following statement(s) is/are true?

 P = $3

 P = $10

 P = $15

 None of the answers is correct.

[Link] 3/15
11/19/22, 5:19 PM Assignment Print View

 10.

Profits are higher as isoprofit curves move closer to the:

 monopoly output, QM.

 Cournot output, QCournot.

 Bertrand output, QBertrand.

 peak of each isoprofit curve.

 11.

In the game shown below, firms 1 and 2 must independently decide whether to charge high or low
prices.

Firm One Firm Two

High Price Low Price
High Price (10,10) (5,-5)
Low Price (5,-5) (0,0)

Which of the following are Nash equilibrium payoffs in the one-shot game?

 (0, 0)

 (5, -5)

 (-5, 5)

 (10, 10)

[Link] 4/15
11/19/22, 5:19 PM Assignment Print View

 12.

In the game shown below, firms 1 and 2 must independently decide whether to charge high or low
prices.

Firm One Firm Two

High Price Low Price
High Price (10,10) (5,-5)
Low Price (5,-5) (0,0)

Which of the following are the Nash equilibrium payoffs (each period) if the game is repeated 10
times?

 (0, 0)

 (5, -5)

 (-5, 5)

 (10, 10)

 13.

Consider the following entry game: Here, firm B is an existing firm in the market, and firm A is a
potential entrant. Firm A must decide whether to enter the market (play "enter") or stay out of the
market (play "not enter"). If firm A decides to enter the market, firm B must decide whether to
engage in a price war (play "hard"), or not (play "soft"). By playing "hard," firm B ensures that firm A
makes a loss of $1 million, but firm B only makes $1 million in profits. On the other hand, if firm B
plays "soft,", the new entrant takes half of the market, and each firm earns profits of $5 million. If
firm A stays out, it earns zero while firm B earns $10 million. Which of the following are Nash
equilibrium strategies?

 (enter, hard) and (not enter, hard)

 (enter, soft) and (not enter, soft)

 (not enter, hard) and (enter, soft)

 (enter, hard) and (not enter, soft)

[Link] 5/15
11/19/22, 5:19 PM Assignment Print View

 14.

The figure below presents information for a one-shot game.

Firm A Firm B
Low Price High Price
Low Price (2,2) (10,-8)
High Price (-8,10) (6,6)

What are secure strategies for firm A and firm B respectively?

 (low price, high price)

 (high price, low price)

 (high price, high price)

 (low price, low price)

 15.

The figure below presents information for a one-shot game.

Firm A Firm B
Low Price High Price
Low Price (2,2) (10,-8)
High Price (-8,10) (6,6)

What are dominant strategies for firm A and firm B respectively?

 (low price, high price)

 (high price, low price)

 (high price, high price)

 (low price, low price)

[Link] 6/15
11/19/22, 5:19 PM Assignment Print View

 16.

Refer to the following game.

Firm A Firm B
Low Price High Price
Low Price (10,9) (15,8)
High Price (-10,7) (11,11)

Which of the following is true?

 A dominant strategy for firm A is "high price."

 There does not exist a dominant strategy for firm A.

 A dominant strategy for firm B is "low price."

 None of the answers is correct.

 17.

Refer to the following game.

Player 2
t1 t2 t3
S1 4,10 3,0 1,3
Player 1
S2 0,0 2,10 10,3

Which of the following strategies constitutes a Nash equilibrium?

 S1, t1

 S2, t2

 S2, t3

 S1, t2

[Link] 7/15
11/19/22, 5:19 PM Assignment Print View

 18.

Refer to the game.

Player 2
t1 t2 t3
S1 10,0 5,1 4,-200
Player 1
S2 10,100 5,0 0,-100

Which of the following pairs of strategies constitute a Nash equilibrium of the game?

 S1, t1

 S1, t2

 S2, t1

 S1, t2 and S2, t1

 19.

It is easier to sustain tacit collusion in an infinitely repeated game if:

 the present value of cheating is lower than collusion.

 there are many players.

 the interest rate is higher.

 the present value of cheating is lower than collusion and the interest rate is higher.

 20.

A coordination problem usually occurs in situations where there is:

 no Nash equilibrium in a game.

 a unique, but undesirable Nash equilibrium.

 a unique, secure strategy for both players.

 more than one Nash equilibrium.

[Link] 8/15
11/19/22, 5:19 PM Assignment Print View

 21.

Suppose P = 20 − 2Q is the market demand function for a local monopoly. The marginal cost is 2Q.
The local monopoly tries to maximize its profits by equating MC = MR and charging a uniform price.
What will be the equilibrium price and output?

 $6.33, 3.33 units

 $6.33, 5 units

 $13.33, 3.33 units

 $10, 5 units

 22.

Suppose P = 20 − 2Q is the market demand function for a local monopoly. The marginal cost is 2Q.
The firm currently uses a standard pricing strategy. Which of the following will allow the firm to
enhance the profits?

 Engage in two-part pricing.

 Engage in commodity bundling.

 Engage in randomized pricing.

 Engage in two-part pricing and engage in commodity bundling.

 23.

Suppose P = 20 − 2Q is the market demand function for a local monopoly. The marginal cost is 2Q.
If fixed costs are zero and the firm engages in two-part pricing, the most profits the firm will earn is:

 $5.

 $10.

 $25.

 $50.

[Link] 9/15
11/19/22, 5:19 PM Assignment Print View

 24.

Which of the following statements is true?

 The more elastic the demand, the higher the profit-maximizing markup.

 The more elastic the demand, the lower the profit-maximizing markup.

 The higher the marginal cost, the lower the profit-maximizing price.

 The higher the average cost, the lower the profit-maximizing price.

 25.

During spring break, students have an elasticity of demand for a trip to Florida of −3. How much
should an airline charge students for a ticket if the price it charges the general public is $360?
Assume the general public has an elasticity of −2.

 $240

 $250

 $260

 $270

 26.

What price should a firm charge for a package of two shirts given a marginal cost of $2 and an
inverse demand function P = 6 − 2Q by the representative consumer?

 $2

 $6

 $8

 $10

[Link] 10/15
11/19/22, 5:19 PM Assignment Print View

 27.

The special cost structure that is necessary for a firm to adopt a peak-load pricing policy is:

 economies of scale.

 economies of scope.

 constant marginal cost.

 limited capacity.

 28.

Which group of policies aims at discouraging rivals from starting a price war?

 Price matching and randomized pricing

 Price matching, brand loyalty, and commodity bundling

 Randomized pricing, price discrimination, and cross-subsidization

 Peak-peak pricing, two-part pricing, and price matching

 29.

Suppose two types of consumers buy suits. Consumers of type A will pay $100 for a coat and $50
for pants. Consumers of type B will pay $75 for a coat and $75 for pants. The firm selling suits faces
no competition and has a marginal cost of zero. If the firm charges $100 for a suit (which includes
both pants and a coat), the firm will sell a suit to:

 type A consumers.

 type B consumers.

 type A consumers and type B consumers.

 None of the answers are correct.

[Link] 11/15
11/19/22, 5:19 PM Assignment Print View

 30.

Suppose two types of consumers buy suits. Consumers of type A will pay $100 for a coat and $50
for pants. Consumers of type B will pay $75 for a coat and $75 for pants. The firm selling suits faces
no competition and has a marginal cost of zero. The optimal commodity bundling strategy is:

 Charge $150 for a suit.

 Charge $75 for a suit.

 Charge $100 for a suit.

 Charge $125 for a suit.

 31.

_______ occurs when people smoke more after buying life insurance.

 Adverse selection

 Moral hazard

 Asymmetric information

 Cournot and Bertrand competition

 32.

To maximize profit in the face of uncertainty, firms should produce the output where:

 expected price equals expected marginal cost.

 expected marginal revenue equals marginal cost.

 expected marginal revenue equals expected marginal cost.

 expected price equals marginal cost.

[Link] 12/15
11/19/22, 5:19 PM Assignment Print View

 33.

Joe's search costs are $5 per search. He wants to buy a video player for his wife for Christmas, and
the lowest price he's found so far is $300. Joe thinks 80 percent of the stores charge $300 for
video players and 20 percent charge $200. Joe's optimal decision is to:

 continue to search for a lower price since the expected benefit of an additional search is
$20, which exceeds his per-unit search costs.

 stop searching and purchase a video player for $200.

 continue to search for a lower price since the expected benefit of an additional search is
$80, which exceeds his per-unit search costs.

 None of the statements is correct.

 34.

You are a hotel manager and you are considering four projects that yield different payoffs,
depending upon whether there is an economic boom or a recession. The potential payoffs and
corresponding payoffs are summarized in the following table.

Project Boom (50%) Recession (50%)

A $20 -$10
B -$10 $20
C $30 -$30
D $50 $50

Which project has the greatest expected value?

 A

 B

 C

 D

[Link] 13/15
11/19/22, 5:19 PM Assignment Print View

 35.

Which of the following phenomena shows that risk aversion is the characteristic of many people?

 Gambling

 Looting

 Investing in one stock rather than a portfolio

 Auto insurance

 36.

An apple farmer must decide how many apples to harvest for the world apple market. He knows
that there is a one-third probability that the world price will be $1, a one-third probability that it will
be $1.50, and a one-third probability that it will be $2. His cost function is C(Q) = 0.01Q2. The
expected profit-maximizing quantity is:

 0.

 90.

 75.

 150.

 37.

The optimal bid in a first-price, sealed-bid auction with independent private values is to bid:

 the true value of the item.

 more than the true value of the item.

 less than the true value of the item.

 the true value of the item and more than the true value of the item, depending upon
whether value estimates are affiliated.

[Link] 14/15
11/19/22, 5:19 PM Assignment Print View

 38.

Which of the following auction examples has a common value information structure?

 Three firms bid for an oil lease.

 An auction of a famous painting.

 A college in need of money decides to name a building on campus after the person willing
to pay the most for the privilege.

 An auction of a famous painting and a college in need of money decides to name a

building on campus after the person willing to pay the most for the privilege.

 39.

To avoid the winner's curse, a bidder should:

 not participate in Dutch auctions.

 only participate in second-price and English auctions.

 revise upward his private estimate of the value of the item.

 revise downward his private estimate of the value of the item.

 40.

John is a seller in an independent private-values auction environment where bidders are risk
neutral. Which auction yields John the greatest expected revenue?

 English

 First price

 Second price

 All of the choices are revenue equivalent.

[Link] 15/15
 42009 Introductory Economics Fall 2022
Answers to Macro2
1.
a. i = 4 percent, P = 1/2
b. i = 5 percent, P = 1

2. Percentage Change in M + Percentage Change in V = Percentage Change in P + Percentage

Change in Y . Here, Percentage Change in V = 0. Percentage Change in M – Percentage Change
in P = Percentage Change in Y. Given that the GDP growth rate is 8 percent, the change in real
money balances is 8 percent as well.

3.
a. 300 = 400 – 20r → r= 5 percent
b. 200
c. The trade surplus will be 100.

4.
a. No. 400 – 20(10) = I = 200.
b. Yes. It decreases by 100.
c. Yes. It decreases by 100.
d. It will rise.

5. a.

b. The fiscal expansion in the rest of the world would raise the world interest rate and low
domestic investment. As a result, the U.S. exchange rate will depreciate, and the trade
balance will move toward surplus.
 42009 Introductory Economics Fall 2022
Macro2
1. Assume that the demand for real money balance (M / P) is M / P = 0.6Y – 100i, where Y is national income,
and i is the nominal interest rate (in percent). The real interest rate r is fixed at 3 percent by the investment and
saving functions. The expected inflation rate equals the rate of nominal money growth.
a. If Y is 1,000, M is 100, and the growth rate of nominal money is 1 percent, what must i and
P be?
b. If Y is 1,000, M is 100, and the growth rate of nominal money is 2 percent, what must i and
P be?

2. For a country A, the GDP growth rate is 8 percent and inflation is 4 percent. If the velocity of money remains
constant, what is the change in real money balances?

3. Assume that in a small open economy with full employment, national saving is 300.
a. If domestic investment is given by I = 400 – 20r, where r is the real interest rate in percent,
what would the equilibrium interest rate be if the economy were closed?
b. If the economy is open and the world interest rate is 10 percent, what will investment be?
c. What will the current account surplus or deficit be? What will net capital outflow be?

4. Assume that in a small open economy with full employment, consumption depends only on disposable
income. National saving is 300, investment is given by I = 400 – 20r, where r is the real interest rate in percent,
and the world interest rate is 10 percent.
a. If government spending rises by 100, does investment change? What is the level of
investment after the change?
b. Does the trade balance change if G rises by 100? If it changes, does it increase or decrease,
and by how much?
c. Does net capital outflow change if G rises by 100? If it changes, does it increase or
decrease, and by how much?
d. Will the real exchange rate rise, fall, or remain constant as a result of the change in G?

5.
a. Suppose that governments around the world begin to engage in expansionary fiscal policy
(that is, run large budget deficits) in order to stimulate economic activity in their countries.
Use the long-run model of a small open economy to graphically illustrate the impact of this
expansionary fiscal policy by foreigners on the U.S. exchange rate and the trade balance.
Assume that the country starts from a position of trade balance (that is, exports equal
imports). Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the
direction the curves shift; and v. the new long-run equilibrium values.
b. Based on your graphical analysis, explain the predicted impact of the foreign expansionary
fiscal policy on the U.S. exchange rate and the U.S. trade balance.

Copyright Macmillan Learning. Powered by Cognero. Page 1

42009 Fall 2022
Answers to Macro1

1) a. 3,900; 1,600; 4 percent

b. 1,600; 0; 1,600
c. 3,900; 1,100; 9 percent
d. 1,600; –500; 1,100

2) Money Multiplier = (1 + cr) / (rr + cr) = 1.2 / 0.4 = 3

Money Supply = Money Multiplier × Monetary Base
Money Supply = 3 × 500 = $1,500 million

3)
1 / (1 + 0.1 / 0.02) = 16.67 percent

4) a. 2,000
b. Yes, the production function exhibits constant returns to scale. Doubling each factor of
production to 200 will double output to 4,000.
c. 10 percent

5) a. Base-year nominal GDP = 20,000.

Later-year nominal GDP = 50,000.
b. Real GDP in base year = 20,000.
Real GDP in later year = 30,000.
c. GDP deflator in later year = 1.667.

6) Adult Population = (10)(70))/100 = 7 million

Labor force = (7,000,000)(100–20))/100 = 5,600,000
Labor-force participation rate = (5,600,000)(100))/7,000,000 = 80 percent
Unemployed population = ((100–60)(5,600,000))/100 = 2,240,000
Unemployment rate = ((2,240,000)(100))/5,600,000 = 40 percent
42009 MACRO1 Fall 2022
1. Assume that GDP (Y) is 6,000. Consumption (C) is given by the equation C = 600 + 0.6(Y – T). Investment
(I) is given by the equation I = 2,000 – 100r, where r is the real rate of interest, in percent. Taxes (T) are 500,
and government spending (G) is also 500.
a. What are the equilibrium values of C, I, and r?
b. What are the values of private saving, public saving, and national saving?
c. If government spending rises to 1,000, what are the new equilibrium values of C, I, and r?
d. What are the new equilibrium values of private saving, public saving, and national saving?

2. The monetary base of Moneyland is $500 million. The currency–deposit ratio (cr) is 0.2, and the reserve–
deposit ratio (rr) is 0.2. Calculate the money multiplier and money supply.

3. If the rate of job separation is 0.02 per month and the rate of job finding is 0.10 per month, what is the natural
rate of unemployment?

4. Consider a production function for an economy:Y = 20(L.5K.4N.1)

where L is labor, K is capital, and N is land. In this economy, the factors of production are in fixed supply with
L = 100, K = 100, and N = 100.
a. What is the level of output in this country?
b. Does this production function exhibit constant returns to scale? Demonstrate by example.
c. If the economy is competitive so that factors of production are paid the value of their
marginal products, what is the share of total income will go to land?

5. Exhibit: Quantity Consumed and Price of Good

Base Year Later Year
Price of good A 100 200
Quantity of good A 100 200
Price of good B 100 100
Quantity of good B 100 100
In the exhibit, the citizens of country XYZ come to desire more of good A. As a result, the quantity and price of
the good both rise.
a. Compute nominal GDP in the base year and later year.
b. Compute real GDP in the base year and later year.
c. Compute the GDP deflator in the later year, using your answers to parts (a) and (b).

6. City A has a total population of 10 million, of which 70 percent are adults. Assume that 20 percent of the
adult population is not looking for a job and 60 percent of the remaining adult population is employed. Compute
the following:
a. Labor-force participation rate
b. Unemployment rate
42009 Introductory Economics Fall 2022

Answers to Problem Set 10

𝐸 −2
1) a. Since E = EF = EM, = (1+𝐸) 𝑀𝐶 = (1−2) $150 = $300.

𝐸 𝑁𝐸 2(−2)
b. 𝑃 = (1+𝐸𝐹 ) 𝑀𝐶 = (1+𝑁𝐸𝑀 ) $150 = (1+2(−2)) $150 = $200
𝐹 𝑀

𝐸 𝑁𝐸 20(−2)
c. 𝑃 = (1+𝐸𝐹 ) 𝑀𝐶 = (1+𝑁𝐸𝑀 ) $150 = (1+20(−2)) $150 = $153.85
𝐹 𝑀

2) a. P = $60, Q = 4, and profits = 4($60 – $20) = $160.

b. Charge the maximum price on the demand curve starting at $100 down to $20 for each
infinitesimal unit up to Q = 8 units. Profits are 8($100 – $20)(.5) = $320.

c. Charge a fixed fee of $320 and a per-unit charge of $20 per unit to earn total profits of $320.

d. Create a package of 8 units and sell the package for $480. Total profits are $320.

3) a. $300,000 (since all consumers purchase each product, you earn $120,000 on sales of
good X and $180,000 on sales of good Y).

b. $250,000 (since only the highest valuation type purchases each product, you earn
$90,000 on sales of good X and $160,000 on sales of good Y).

c. Since all consumers receive at least $150 in value from the bundle, all types buy the
bundle. Profits are thus $450,000.

b. Type 2 consumers will purchase the bundle. Type 1 consumers will purchase good X only, and
type 3 consumers will purchase product Y only. Total profits are thus $210,000 + $90,000 +
$160,000 = $460,000.

4) With a simple per-unit pricing strategy, the optimal per-unit price is determined by MR = MC.
Here, the inverse demand function is P = 1,500 – 5Q, so MR = 1,500 – 10Q. Also, MC = $1,000
and fixed costs are $15,000. Equating MR and MC yields 1,500 – 10Q = 1,000. Solving, Q = 50
and P = 1,500 – 5(50) = $1,250. Profits at this price are ($1,250 - $1,000)(50) – $15,000 = -
$2,500.

Under the second-degree price discrimination strategy, 10 units (computed as 300 – 0.2($1,450) =
10) are purchased at $1,450 and an additional 45 units are purchased at a price of $1,225 (total
quantity demanded at a price of $1,225 is 55 units, but 10 of these will be sold at $1,450). Profits
from the second-degree price discrimination scheme are thus ($1,450 –$1,000)(10) + ($1,225 –
$1,000)(45) – $15,000 = -$375.
A profitable and feasible recommendation would be two-part pricing. Under this proposal, the client
would pay a fixed “license fee” plus a per-unit fee for each unit of the software installed and
maintained. The optimal two-part price sets the per-unit fee at $1,000 per unit (marginal cost). At this
price, the client will purchase 100 units of the software. The optimal fixed fee is $25,000 (computed as
(.5)($1,500-$1,000)(100) = $25,000). Profits under two-part pricing are $25,000 - $15,000 = $10,000.

5) If the managers were given incentives to maximize each division’s profits separately, overall profits
would be lower due to double marginalization.
Since the company manufacturers single engine planes, Qu = Qd = Q. Here, MRd = 812,000 – 6,000Q;
MCd = 12,000; and MCu = 10,000Q. Thus, NMRd = MRd - MCd = 812,000 – 6,000Q – 12,000 = 800,000
– 6,000Q. The optimal output equates NMRd and MCu: 800,000 – 6,000Q = 10,000Q. Solving yields Q
= 50. The optimal transfer price is thus the upstream marginal cost of producing this level of output:
PT = MCu= 10,000(50) = $500,000 per engine.
42009 Introductory Economics Fall 2022

Problem Set 10

1) Based on the best available econometric estimates, the market elasticity of demand for your
firm’s product is –2. The marginal cost of producing the product is constant at $150, while
average total cost at current production levels is $225. Determine your optimal per unit price if:
a. You are a monopolist.
b. You compete against one other firm in a Cournot oligopoly.
c. You compete against 19 other firms in a Cournot oligopoly.

2) Based on the following graph (which summarizes the demand, marginal revenue, and relevant
costs for your product), determine your firm’s optimal price, output, and the resulting profits for
each of the following scenarios:
a. You charge the same unit price to all consumers.
b. You engage in first-degree price discrimination.
c. You engage in two-part pricing.
d. You engage in block pricing.

3) You are the manager of a firm that produces products X and Y at zero cost. You know that
different types of consumers value your two products differently, but you are unable to identify
these consumers individually at the time of the sale. In particular, you know there are three
types of consumers (1,000 of each type) with the following valuations for the two products:

a. What are your firm’s profits if you charge $40 for product X and $60 for product Y?

b. What are your profits if you charge $90 for product X and $160 for product Y?
c. What are your profits if you charge $150 for a bundle containing one unit of product X and one
unit of product Y?

d. What are your firm’s profits if you charge $210 for a bundle containing one unit of X and one
unit of Y, but also sell the products individually at a price of $90 for product X and $160 for product Y?

4) You are a pricing analyst for QuantCrunch Corporation, a company that recently spent$15,000
to develop a statistical software package. To date, you only have one client. A recent internal
study revealed that this client’s demand for your software is Qd = 300 –0.2P and that it would
cost you $1,000 per unit to install and maintain software at this client’s site. The CEO of your
company recently asked you to construct a report that compares (1) the profit that results from
charging this client a single per-unit price with (2) the profit that results from charging $1,450
for the first 10 units and $1,225 for each additional unit of software purchased. Construct this
report, including in it a recommendation that would result in even higher profits.

5) Blue Skies Aviation is a manufacturer of small single-engine airplanes. The company is relatively
small and prides itself on being the only manufacturer of customized air-planes. The company’s
high standard of quality is attributed to its refusal to purchase engines from outside vendors,
and it preserves its competitive advantage by refusing to sell engines to competitors. To achieve
maximum efficiencies, the company has organized itself into two divisions: a division that
manufactures engines and a division that manufactures airplane bodies and assembles
airplanes.

Demand for Blue Skies’ customized planes is given by P = 812,000 − 3,000Q. The cost of
producing engines is Ce(Qe) = 5,000Qe2 and the cost of assembling airplanes is Ca(Q) = 12,000Q.
What problems would occur if the managers of each division were given incentives to maximize
each division’s profit separately? What price should the owners of Blue Skies set for engines in
order to avoid this problem and maximize overall profits?
42009 Introductory Economics Fall 2022

Answers to Problem Set 9

1) Your expected inverse demand is E(P) = .6(300,000 – 400Q) + .4(500,000 – 275Q) = 380,000 – 350Q.
Therefore, your expected marginal revenue is E(MR) = 380,000 – 700Q.
Your marginal cost is MC = $240,000. Setting E(MR) = MC yields 380,000 – 700Q = 240,000.
Solving, Q = 200. The price you expect is thus E(P) = 380,000 – 350(200) = $310,000. Your profits are
thus ($310,000 -$240,000)(200) - $140,000 = $13,860,000.

2)
a. The expected value of option 1 is
1/16(150)+4/16(300)+6/16(750)+4/16(300)+1/16(150) = 450.
The expected value of option 2 is
1/5(120)+1/5(255)+1/5(1,500)+1/5(255)+1/5(120) = 450.
b. The variance of option 1 is
1/16(150-450)2+4/16(300-450)2+6/16(750-450)2+4/16(300-450)2+1/16(150-450)2 = 56,250
Similarly, the variance of option 2 is 279,270.
The standard deviation of option 1 is 237.17. The standard deviation of option 2 is 528.46.
c. Option 2 is riskier since both have the same mean but option 2 has greater variance.

3)
a. Risk loving
b. Risk averse.
c. Risk neutral.

4)
a. With only two bidders, n = 2. The lowest possible valuation is L = $1,500, and your own
valuation is v = $4,000. Thus, your optimal sealed bid is
b=v-[(v-L)/n] = $4,000-[($4,000-$1,500)/2] = $2,750.
b. With ten bidders, n = 10. The lowest possible valuation is L = $1,500, and your own
valuation is v = $4,000. Thus, your optimal sealed bid is
b=v-[(v-L)/n] = $4,000- [($4,000-$1,500)/10] = $3,750.
c. With one hundred bidders, n = 100. The lowest possible valuation is L = $1,500, and your
own valuation is v = $4,000. Thus, your optimal sealed bid is
b=v-[(v-L)/n] = $4,000-{($4,000-$1,500)/100] = $3,975.

5) The expected benefit from an additional search are 0.10($190,000 - $140,000) = $5,000, while the
cost of another search is $10,500. Therefore, make her an offer.

6) The 30-day warranty and 10-point inspection. This not only reduces buyer risk from being duped by
a used car dealer, but provides a costly signal about the quality of the used cars. An unscrupulous
dealer would find it costly to mimic this strategy. Recognizing both of these facts, rational buyers
will be more willing to purchase cars from the dealer.
42009 Introductory Economics Fall 2022

Problem Set 9

1) As the manager of Smith Construction, you need to make a decision on the number of
homes to build in a new residential area where you are the only builder. Unfortunately,
you must build the homes before you learn how strong demand is for homes in this large
neighborhood. There is a 60 percent chance of low demand and a 40 percent chance of
high demand. The corresponding (inverse) demand functions for these two scenarios are
P = 300,000 − 400Q and P = 500,000 − 275Q, respectively. Your cost function is
C(Q) = 140,000 + 240,000Q. How many new homes should you build, and what profits
can you expect?
2) Consider the two options in the following table, both of which have random outcomes:

a. Determine the expected value of each option.

b. Determine the variance and standard deviation of each option.
c. Which option is most risky?

3) For each of the following scenarios, determine whether the decision maker is risk neu-tral, risk
averse, or risk loving.
a. A manager prefers a 20 percent chance of receiving $1,400 and an 80 percent chance of
receiving $500 to receiving $680 for sure.
b. A shareholder prefers receiving $920 with certainty to an 80 percent chance of
receiving $1,100 and a 20 percent chance of receiving $200.
c. A consumer is indifferent between receiving $1,360 for sure and a lottery that
pays$2,000 with a 60 percent probability and $400 with a 40 percent probability.
4) You are a bidder in an independent private values auction, and you value the object at$4,000.
Each bidder perceives that valuations are uniformly distributed between $1,500 and $9,000.
Determine your optimal bidding strategy in a first-price, sealed-bid auction when the total
number of bidders (including you) is:
a. 2.
b. 10.
c. 100.
5) BK Books is an online book retailer that also has 10,000 “bricks and mortar” outlets worldwide.
You are a risk-neutral manager within the Corporate Finance Division and are in dire need of a
new financial analyst. You only interview students from the top MBA programs in your area.
Thanks to your screening mechanisms and contacts, the students you interview ultimately differ
only with respect to the wage that they are will-ing to accept. About 10 percent of acceptable
candidates are willing to accept a salary of $140,000, while 90 percent demand a salary of
$190,000. There are two phases to the interview process that every interviewee must go
through. Phase 1 is the initial one-hour on-campus interview. All candidates interviewed in
Phase 1 are also invited to Phase 2 of the interview, which consists of a five-hour office visit. In
all, you spend six hours interviewing each candidate and value this time at $2,500. In addition, it
costs a total of$8,000 in travel expenses to interview each candidate. You are very impressed
with the first interviewee completing both phases of BK Books’s interviewing process, and she
has indicated that her reservation salary is $190,000. Should you make her an offer at that salary
or continue the interviewing process? Explain.

6) This past year, Used Imported Autos sold very few cars and lost over $500,000. As a
consequence, its manager is contemplating two strategies to increase its sales volume. The low-
cost strategy involves changing the dealership name to Quality Used Imported Autos to signal to
customers that the company sells high-quality cars. The high-cost strategy involves issuing a 10-
point auto inspection on all used cars on the lot and offer-ing consumers a 30-day warranty on
every used car sold. Which of these two strategies do you think would have the greatest impact
on sales volume? Explain.
42009 Introductory Economics Fall 2022
Answers to Problem Set 8

1. a. Neither player has a dominant strategy.

b. Given the worst possible scenario, the highest guaranteed payoff for Player 1 is B and
the highest guaranteed payoff for Player 2 is E.

c. Nash equilibrium states, given the strategies of other players, no player can improve
their payoff by unilaterally changing their own strategy. Therefore, Nash equilibrium for
Player 1 is strategy B and Nash equilibrium for player 2 is strategy E.

2. The normal form game looks like this:

Honda
Strategy Airbags No Airbags
Toyota Airbags $2.5, 2.5 $3,-$1.5
No Airbags -$1.5, $3 $1, $1

The dominant strategy, in this case, would be to offer airbags.

3. The extensive form game looks like this:

($200, $300)
Not Introduce

P
1
Price War ($100, $100)

Introduce C
2

Acquiesce ($227, $275)

Notice that Coca-Cola’s best response if Pepsi introduces is to acquiesce to earn $275
million rather than to start a price war and earn $100. Thus, while Coca-Cola might
threaten to start a price war in an attempt to keep you out of the market, this threat isn’t
credible; your best option is to introduce.

4. Firm1 and Firm2

a. NE is (LP, LP) with a payoff of 50 each
 b. We strat at the 2nd stage and work backwards. The second stage the matrix
looks like as is, so the NE will be (LP, LP) and each firm earns 50. We carry
this payoff to the first stage (add 50 to each payoff). Twice repeated game will
show a matrix as follows

Firm2
High Price Low Price
Firm1 (HP) (LP)
HP 110, 110 86, 120
LP 120, 86 100, 100

Using best response analysis on the aggregtaed matrix we see that NE does not change. It is still
(LP, LP). Hence the subgame perfect equilibrium of the twice repeated game is {(LP, LP, (LP,
LP)} and the total SPE payoff to each firm will be 100. The NE of the stage game is played in
both stages.

Note that if the game is repeated a finite number of times (N times), then we will observe (LP,
LP) in all N stages and total payoff to each firm will be N*50.

c. We need to compare the payoffs to cheating and payoffs to cooperation. Let δ

be the discount rate, then present value of payoffs from cooperation and
cheting are:

PV(Cooperation) = 60 (1 + δ + 2 …) = 60/(1- δ)

PV(Cheating) = 70 + 50δ/(1- δ)

Cooperation is subgame perfect if:

PV(Cooperation) > PV(Cheating)

60/(1- δ) > 70 + 50δ/(1- δ)

Hence, solving for δ we see that cooperation will be subgame perfect if δ > ½.
 5. Using backwards induction, we identify the best responses at each stage. Starting with
Player 3’s decision node, we see that if the game ever reaches that node, the best
Player 3 can do is to play Down and get 9 (instead of playing Up and getting 7). Both
Player 1 and Player 2 know this, so the game tree reduces to:

Player 1

Down Up

Player 2 Player 2

Down Middle Up
Down Up

4, 4, 4 3, 8, 1 2, 4, 6

3, 1, 2 6, 8, 9

Then Player 2 chooses Up in her first decision node (since 8>1) and Middle in her second
decision node (since 8>4). Player 1 knows this so we can further trim the game tree

Player 1

Down Up

6, 8, 9 3, 8, 1
Comparing his options, Player 1 chooses Down (since 6>3). Then the SPE is:

{ D, (U, M), D }

(note that Player 2 has an equilibrium strategy assigned to each one of her decision nodes)

with corresponding payoffs: (6, 8, 9)

42009 Introductory Economics Fall 2022

Problem Set 8

1. Use the following one-shot, normal form game to answer the following questions

a. Find each player’s dominant strategy, if it exists.

b. Find each player’s secure strategy.
c. Find the Nash equilibrium.

2. Suppose Toyota and Honda must decide whether to make a new breed of side-impact airbags
standard equipment on all models. Side-impact airbags raise the price of each automobile by
$1,000. If both firms make side-impact airbags standard equipment, each company will earn
profits of $2.5 billion. If neither company adopts the side-impact air-bag technology, each
company will earn $1 billion (due to lost sales to other automakers). If one company adopts the
technology as standard equipment and the other does not, the adopting company will earn a
profit of $3 billion and the other company will lose $1.5 billion. If you were a decision maker at
Honda, would you make side-impact airbags standard equipment? Explain.

3. Coca-Cola and PepsiCo are the leading competitors in the market for cola products. In 1960
Coca-Cola introduced Sprite, which today is among the worldwide leaders in the lemon-lime soft
drink market and ranks in the top 10 among all soft drinks worldwide. Prior to 1999, PepsiCo did
not have a product that competed directly against Sprite and had to decide whether to
introduce such a soft drink. By not introducing a lemon-lime soft drink, PepsiCo would continue
to earn a $200 million profit, and Coca-Cola would continue to earn a $300 million profit.
Suppose that by introducing a new lemon-lime soft drink, one of two possible strategies could
be pursued: (1) PepsiCo could trigger a price war with Coca-Cola in both the lemon-lime and cola
markets or (2) Coca-Cola could acquiesce and each firm maintain its current 50/50 split of the
cola market and split the lemon-lime market 30/70 (PepsiCo/Coca-Cola). If PepsiCo introduced a
lem-on-lime soft drink and a price war resulted, both companies would earn profits of$100
million. Alternatively, Coca-Cola and PepsiCo would earn $275 million and $227 million,
respectively, if PepsiCo introduced a lemon-lime soft drink and Coca-Cola acquiesced and split
the markets as listed. If you were a manager at PepsiCo, would you try to convince your
colleagues that introducing the new soft drink is the most profitable strategy? Why or why not?

4. Consider the following matrix game between Firm1 and Firm2.

a. What is the NE of the matrix?
b. If the game is repeated twice. How would players see the first period payoff matrix?
What would be the SPE?
 c. If the game is repeated infinitely many times, at which discount rate playing a trigger
strategy would be subgame perfect?

Firm2

Firm1
Strategy High Price (HP) Low Price (LP)
HP 60, 60 36, 70
LP 70, 36 50, 50

5. Find the SPE of the following three-player extensive form game. Payoffs at the end nodes are for

(Player1, Player 2, Player 3)

Player 1

Down Up

Player 2
Player 2

Up Down
Down Up
Middle
Player 3
3, 1, 2
4, 4, 4 3, 8, 1 2, 4, 6
Down Up

6, 8, 9 10, 1, 7
 42009 Introductory Economics Fall 2022

Answers to problem Set 7

𝑎−𝑐1 1 200−26 1
1. a. 𝑄1 = 2𝑏
− 2 𝑄2 = 2(3) − 2 𝑄2 = 29 − 0.5𝑄2 and
𝑎−𝑐 1 200−32 1
𝑄2 = 2𝑏 2 − 2 𝑄1 = 2(3) − 2 𝑄1 = 28 − 0.5𝑄1

b. Q1 = 20; Q2 = 18.

c. P = 200 – 3(38) = $86.

d. Π1 = $1,200; Π2 = $972.

2. a. First find the firms' best response functions. Firm 1's profit is

y1(120 y1 y2) 30y1.

Taking the derivative of this profit with respect to y1 (holding y2 constant) and setting the
derivative equal to zero we obtain

120 2y1 y2 30 = 0,

or y1 = (90 y2)/2.

Thus the best response function of firm 1 is given by b1(y2) = (90 y2)/2. This function is
shown in the following figure.

Similarly, we find that the best response function of firm 2 is given by b2(y1) = (90
y1)/2. This function is superimposed on the best response function of firm 1 in the
following figure.
 We now need to find a pair (y1, y2) of outputs with the property that

y1 = b1(y2) and y2 = b2(y1).

That is, y1 = (90 y2)/2 and y2 = (90 y1)/2.

Substituting one equation in the other we obtain y1 = (90 (90 y1)/2)/2, so that y1 = 30;
substituting in the equation for y2 we get y2 = 30.

We conclude that there is a unique Nash equilibrium, in which the output of each firm is 30.
Each firm's profit is (30)(120 30 30) (30)(30) = 900.

b. First find the firms' best response functions. If firm 1 chooses the output y1 its profit is

y1(120 y1 y2) y12.

Taking the derivative of this profit with respect to y1 (holding y2 constant) and setting the
derivative equal to zero we obtain

120 2y1 y2 2y1 = 0,

or y1 = (120 y2)/4.

Thus the best response function of firm 1 is given by b1(y2) = (120 y2)/4.

Similarly, we find that the best response function of firm 2 is given by b2(y1) = (120
y1)/4.

We now need to find a pair (y1, y2) of outputs with the property that

y1 = b1(y2) and y2 = b2(y1).

 That is, y1 = (120 y2)/4 and y2 = (120 y1)/4.

Substituting one equation in the other we obtain y1 = (120 (120 y1)/4)/4, so that y1 =
24; substituting in the equation for y2 we get y2 = 24.

We conclude that there is a unique equilibrium, in which the output of each firm is 24. Each
firm's profit is (24)(120 24 24) (24)2 = 1152.

c. The best response function of firm 1 is b1(y2) = (90 y2)/2 (see part a) and the best response
function of firm 2 is b2(y1) = (120 y1)/4 (see part b).

Thus the Cournot equilibrium is determined by the solution of the following equations:

y1 = (90 y2)/2
y2 = (120 y1)/4.
There is a single solution, (y1, y2) = (240/7, 150/7).
3.
Model Output Profits

Cournot Q1 = Q2 = 33.33 π1 = π2 = $3,333.33

Stackelberg QL = 50; QF = 25 πL = $3,750; πF = $1,875

Bertrand Market output = 100 units Zero

Collusion Market output = 50 units Industry Profits = $7,500

4. a. Firm 1’s output and profit would increase. Firm 2’s output and profits would decrease.

b. For small changes in costs, there would be no change in output or profits.

900 − 0.5𝑄 𝑖𝑓 𝑄 ≤ 240

5. The inverse demand function for this Sweezy oligopoly is 𝑃 = { .
1,500 − 3𝑄 𝑖𝑓 𝑄 ≥ 240
The marginal revenue function is
900 − 𝑄 𝑖𝑓 𝑄 < 240
𝑀𝑅 = { [60,660] 𝑖𝑓 𝑄 = 240
1,500 − 6𝑄 𝑖𝑓 𝑄 > 240

Therefore, changes in marginal cost in the range of $60 and $660 will not result in a
change in the profit-maximizing level of output.
42009 Introductory Economics Fall 2022

Problem Set 7

1) The inverse market demand in a homogeneous-product Cournot duopoly is P = 200 −

3(Q1 + Q2) and costs are C1(Q1) = 26Q1 and C2(Q2) = 32Q2.
a. Determine the reaction function for each firm.
b. Calculate each firm’s equilibrium output.
c. Calculate the equilibrium market price.
d. Calculate the profit each firm earns in equilibrium.
2) In a duopoly, the inverse demand function for the firms' output is p = 120 Q, where Q
is the total output (Q = y1 + y2)
a. Each firm has the cost function C(y) = 30y. What are the firms' outputs and profits
in the Cournot equilibrium?
b. Each firm has the cost function C(y) = y2. What are the firms' outputs and profits
in the Cournot equilibrium?
c. One whose cost function is C1(y1) = 30y1 and another whose cost function is
C2(y2) = y22. What are the firms' outputs in the Cournot equilibrium?
3) Two firms compete in a market to sell a homogeneous product with inverse demand
function P = 600 − 3Q. Each firm produces at a constant marginal cost of $300 and has
no fixed costs. Use this information to compare the output levels and profits in settings
characterized by Cournot, Stackelberg, Bertrand, and collusive behavior.
4) Consider a homogeneous-product duopoly where each firm initially produces at a
constant marginal cost of $200 and there are no fixed costs. Determine what would
happen to each firm’s equilibrium output and profits if firm 2’s marginal cost increased to
$210 but firm 1’s marginal cost remained constant at $200 in each of the following
settings:
a. Cournot duopoly.
b. Sweezy oligopoly.
5) PC Connection and CDW are two online retailers that compete in an Internet market
for digital cameras. While the products they sell are similar, the firms attempt to differentiate
themselves through their service policies. Over the last couple of months, PC Connection has
matched CDW’s price cuts but has not matched its price increases. Suppose that when PC
Connection matches CDW’s price changes, the inverse demand curve for CDW’s cameras is
given by P = 1,500 − 3Q. When it does not match price changes, CDW’s inverse demand curve
is P = 900 − 0.50Q. Based on this information, determine CDW’s inverse demand and marginal
revenue functions over the last couple of months. Over what range will changes in marginal cost
have no effect on CDW’s profit-maximizing level of output?