More Practice Problem

1. In the market for a product, there are 100 identical competitive firms, each firm having the cost
function c(q) = 0.5 q2 +5q +50 where q is the quantity of output in tons produced by each firm. The
market demand curve is given by Qd = 1660−20p.

(a) Find the market equilibrium price p∗ and quantity produced by each firm, q∗. Set p = MC to obtain p
= 5 + q, from where a firm’s supply curve is qs = p−5. Since there are 100 firms, the market supply is Qs =
100p−500. Set this equal to Qd = 1660−20p and solve to obtain p∗ = $18 and q∗ = 13.

(b) A permanent increase in demand shifts the market demand to Qd = 1900−20p. What will be the
approximate price p∗∗ (up to two decimal places) in this market in the short run? In the short run, the
number of firms does not change, so the market supply is the same as before: Qs = 100p−500. Set this
equal to the new demand Qd = 1900−20p to get the approximate price p∗∗ = $20.17.

(c) Given the permanent increase in demand, how many firms will there be in this market in the long run
after entry or exit? Thelongrunpriceiswhere AC = MC. Setting0.5q+4+18/q = q + 4, we obtain the firm’s
long-run output qlr = 10 and longrun price plr = $15. The total quantity demanded at this price is Qd(15)
= 1600. Therefore the total number of firms in this market will be 1600/10 = 160 firms.

2. In the market for manhole covers, there are 120 identical firms, each firm having the cost function
c(q) = 0.5 q2 + 4q + 18 where q is the number of manhole covers produced by each firm. The market
demand curve is given by Qd(p) = 1720−100p.

(a) Find a firm’s individual supply curve qs(p) and the market supply curve Qs(p). Calculate the market
equilibrium price p∗ and quantity Q∗. Calculate the output q∗ that each firm produces and a typical
firm’s profit level.

Solution: A typical firm produces by setting price equal to marginal cost, p = 4+q, from which the firm’s
supply curve is qs(p) = p−4, so long as p ≥ 4. Since there are 120 firms, the market supply is Qs(p) =
120qs(p) = 120(p−4). Set the supply equal to the demand, Qd(p) = 1720−100p,and solve to obtain p∗ =
$10 and Q∗ = 720. Each firm produces q∗ = 6 and earns a zero profit, i.e., the industry is in long run
equilibrium.

(b) The government imposes a tax of $1 per manhole cover produced on each firm. What will be the
long-run price after entry or exit? If the tax remains in place, calculate the approximate number of firms
in the longrun (round down to the nearest integer). Theafter-tax cost function is c(q) = 18+5q+0.5 q2.
The marginal cost after-tax is therefore MC = 5 + q. Consequently, the new firm supply curve is qs(p) =
p−5 so long as p > 5. Calculate the long-run quantity produced by setting MC = AC:

5+q =18 q+5+0.5q, or qlr = 6. Plug this into the MC or AC to obtain the long-run price, plr = $11. The
market quantity demanded at plr = 11 is 620. Given that each firm produces 6 units, the approximate
number of firms that remain in the market after entry is 620/6 ≈ 103 approximately.
3. In the market for soy beans, there are 520 identical farms, each farm having the cost function c(q) =
0.5 q2 +3q+32 where q is the quantity of output in tons produced by each farm. The market demand
curve is given by Qd(p) = 4640−100p. Find a firm’s individual supply curve qs(p) and the market supply
curve Qs(p).

Solution: A typical farm produces by setting price equal to marginal cost

p = 3+q, from which the firm’s supply curve is qs(p) = p−3, so long as p ≥ 3. Since there are 520 farms,
the market supply is Qs(p) = 520qs(p) = 520(p−3). Set the supply equal to the demand,

4. Suppose that demand is P = 2(50 − Q) and a cost function of monopolist is C(Q) = 5 +4Q.
What is the amount of per unit subsidy s that encourages the monopolist to produce Q = 25?

a. 2
*b. 4
c. 96
a. None of the other three answers.

5. One difference between equilibrium in perfectly competitive markets and single-price monopoly
markets is that

A) marginal cost equals average variable cost for perfectly competitive firms but not for monopolists.

B) marginal revenue equals marginal cost for perfectly competitive firms, but not for monopolists.

C)* marginal revenue equals price for perfectly competitive firms, but not for single-price monopolists.

D) All the above answers are correct.

6. If a monopolist is able to perfectly price discriminate,

A) consumer surplus is always increased.

B) total surplus is always decreased.

C)* consumer surplus and deadweight losses are transformed into monopoly profits.

D) the price effect dominates the output effect on monopoly revenue.

7. A surprising outcome of the Rock-Paper-Scissors game is that

A) it is a clear example of a first mover advantage.

B) there is no pure-strategy Nash equilibrium.

C) it is best not to play the game.

D) it is a good way to determine who goes first in a sequential move game.

8. Now consider the sequential version of the Rock-Paper-Scissors game where player one reveals his
move first and then player two moves.

a. How many strategies does player 2 have? (27)

b. Any mover’s advantage? (Second-mover)

c. How many SPNE does the game have? (Three SPE equilibria: 1 can choose either of the 3 strategies, 2
choses Rock if 1 plays Scissors, Paper if 1 plays Rock, Scissors if 1 plays Paper )

9. The following game has

a. two Nash equilibria.

b. three Nash equilibria.
*c. a unique Nash equilibrium.
d. None of the above.
10 . In a duopoly market, the firms A and B face the inverse demand function P = 20 – Q. The cost
function of the firms are as follows: Firm A: C(QA) = 10 + 8QA; Firm B: C(QB) = 20 + 8QB.

A) Calculate the outputs, the equilibrium price and the profit/loss of the firms A and B if they
compete in a Cournot (quantity competition) set-up.
B) Calculate the outputs, the equilibrium price and the profit/loss of the firms A and B if they
compete in a Stackelberg (quantity competition) set-up, where A is the leader and B the
follower.
C) Calculate the outputs, the equilibrium price and the profit/loss of each firm if they compete in a
Bertrand (price competition) set-up.
D) Suppose that the firms form a cartel and each produces half of the total output. What will be
the equilibrium price and the output that each firm produces? Calculate the profit/loss of each
firm.
E) Calculate the consumer surplus in all four cases and discuss which of the above situations -
Cournot quantity competition, Stackelberg quantity competition, Bertrand price competition, or
a cartel - would be the best for the consumers.

See the solution at the end

11. Suppose Cournot duopolists firms face the same market demand curve, but have differing costs.
At the Nash-Cournot equilibrium, the firm with the lower cost will

A) have a lower price for its product than its competitor.

B) produce a smaller output than its competitor.
C) have a higher price for its product than its competitor.
D) produce a larger output than its competitor.

12. An industry has two firms producing at a constant unit cost of $10 per unit. The
inverse demand curve for the industry is p = 110 − .5q. Suppose that firm 1 is a
Stackelberg leader in choosing its quantity. How much output will firm 2, the
follower, produce?

a. 40 units.
b. 15 units.
c. 20 units.
*d. 50 units.
 13. Which of the following models results in the highest level of output assuming a fixed
number of firms with identical costs and a given demand curve in the Cournot and
Stackelberg models?

a. Cournot
*b. Stackelberg
c. Monopoly
d. Output is the same in all three models.

14. Which of the following models results in the highest price assuming a fixed number of
firms with identical costs and a given demand curve in the Cournot and Stackelberg
model?

a. Cournot
b. Stackelberg
*c. Monopoly
d. Output is the same in all three models.

15. Under standard Bertrand competition between identical firms in a single market where
the firm with the lowest price takes the entire market (assume the price is non-negative
real number),
a. Firms can make positive profits in equilibrium
*b. There is a unique equilibrium in which both firms charge the price equals to
marginal cost
c. Firms make zero profits but price may be above the marginal cost
d. None of the above

Question 10: