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Economics Problem Set: Market Dynamics & Trade

The document is a problem set for an Introduction to Economics course, covering topics such as monopolistic competition, trade relations, and consumer choice. It includes multiple problems that require analysis of demand curves, firm production, trade strategies, and budget constraints. Each problem prompts students to explore concepts like Nash equilibrium, dominant strategies, and the effects of price changes on consumption choices.

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9 views2 pages

Economics Problem Set: Market Dynamics & Trade

The document is a problem set for an Introduction to Economics course, covering topics such as monopolistic competition, trade relations, and consumer choice. It includes multiple problems that require analysis of demand curves, firm production, trade strategies, and budget constraints. Each problem prompts students to explore concepts like Nash equilibrium, dominant strategies, and the effects of price changes on consumption choices.

Uploaded by

10323025
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Winter Semester 2025

INTRODUCTION TO ECONOMICS
PROBLEM SET 3

Problem 1
Consider a monopolistically competitive market with N firms. Each firm’s business opportunities
are described by the following equations:

ˆ Demand:
100
Q= −P
N
ˆ Marginal revenue:
100
MR = − 2Q
N
ˆ Total cost:
T C = 50 + Q2

ˆ Marginal cost:
M C = 2Q

a. How does N, the number of firms in the market, affect each firm’s demand curve? Why?

b. How many units does each firm produce? (The answers to this and the next two questions depend
on N).

c. What price does each firm charge?

d. How much profit does each firm make?

e. In the long run, how many firms will exist in this market?

Problem 2
Consider trade relations between the United States and Mexico. Assume that the leaders of the
two countries believe the payoffs to alternative trade policies are as follows:

1
a. What is the dominant strategy for the United States? For Mexico? Explain.

b. Define Nash equilibrium. What is the Nash equilibrium for trade policy?

c. In 1993, the U.S. Congress ratified the North American Free Trade Agreement, in which the United
States and Mexico agreed to reduce trade barriers simultaneously. Do the perceived payoffs shown
here justify this approach to trade policy? Explain.

d. Based on your understanding of the gains from trade (discussed in Chapters 3 and 9), do you think
that these payoffs actually reflect a nation’s welfare under the four possible outcomes?

Problem 3
Synergy and Dynaco are the only two firms in a specific high-tech industry. They face the
following payoff matrix as they decide upon the size of their research budget:

a. Does Synergy have a dominant strategy? Explain.

b. Does Dynaco have a dominant strategy? Explain.

c. Is there a Nash equilibrium for this scenario? Explain. (Hint: Look closely at the definition of Nash
equilibrium).

Problem 4
A college student has two options for meals: eating at the dining hall for $6 per meal or eating
a Cup O’ Soup for $1.50 per meal. Her weekly food budget is $60.

a. Draw the budget constraint showing the trade-off between dining hall meals and Cups O’ Soup.
Assuming that she spends equal amounts on both goods, draw an indifference curve showing the
optimum choice. Label the optimum as point A.

b. Suppose the price of a Cup O’ Soup now rises to $2. Using your diagram from part (a), show the
consequences of this change in price. Assume that our student now spends only 30 percent of her
income on dining hall meals. Label the new optimum as point B.

c. What happened to the quantity of Cups O’ Soup consumed as a result of this price change?
What does this result say about the income and substitution effects? Explain.

d. Use points A and B to draw a demand curve for Cup O’ Soup. What is this type of good called?

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