BITS PILANI, K.K.

BIRLA GOA CAMPUS

II SEMESTER 2017-18 COMPREHENSIVE EXAM
Course No. ECON F242 Course Title: Microeconomics
1/5/2018 Time: 3 hours Total Marks: 50
Instructions:
1. Provide precise and legible answers for each question.
2. Assume fractional answers are feasible, wherever applicable.
3. If you need to make any assumptions, clearly state them.

1. Consider Firm1 and Firm2 producing a homogeneous product. Assume that the inverse
market demand function is P = 100 − 0.5Q where Q denotes total output. The Total Cost
functions of the firms are c1 (q1 ) = 5q1 and c2 (q2 ) = 0.5q22 where qi denotes output
produced by Firm i =1, 2.
a) Consider the setup of Cournot model. Briefly explain which firm would have
“Reaction function” and why? [3]
b) Calculate the Cournot equilibrium profits of the 2 firms. [5]
c) Now consider the setup of Stackelberg model. Assume Firm2 as the leader and
Firm1 as the follower. Briefly explain which firm would have “Reaction function”
and why? [2]
d) Calculate the profit of leader Firm2 and follower Firm1. [5]
e) Suppose Firm 2 had to bribe the government to become the leader and get the license
to choose the quantity first. Instead, if Firm2 was not the leader then both the firms
would have chosen output simultaneously. Calculate the maximum bribe that Firm 2
would be willing to pay. [5]

2. In February2018, the Prime Minister proposed various strategies to achieve the agenda of
doubling farmers’ income. The objective of this exercise is to evaluate one of the
strategies. Assuming a perfectly competitive agricultural product market, suppose the
government announces a Minimum Support Price equal to double of the current
equilibrium price.
Consider old Scenario: the government would not purchase any crop from the farmers.
Now consider the new Scenario: the government would purchase excess crop from the
farmers at the Minimum Support price. Using a properly constructed diagram, compare
the two scenarios in terms of social welfare. [5]

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3. Suppose a monopolist faces demand function P = 30 − Q and Total Cost
c(Q) = Q 3 − 8Q 2 + 30Q + 1
a) Suppose the firm cannot discriminate between the consumers. Calculate the profit of
the monopolist. [3]
b) Now suppose the firm can perfectly discriminate between the consumers. Calculate
the output chosen the monopolist. [3]
c) Suppose the government enforces P=10. Recommend the optimal strategy of the
monopolist given this enforced price. [6]

4. Suppose Tata Sky is the only service provider in Ladakh. It faces demand function
P = 50-0.1Q and its total cost of providing service is TC = 500 + Q. Assume that the
company is not able to discriminate among the customers.

a) If the regulator (TRAI) wants to ensure that there is no deadweight loss in this market,
then calculate the regulated price it should enforce on Tata Sky. Calculate the resultant
profit/loss of Tata Sky. [3]
b) If TRAI wants to ensure that Tata Sky just earns “break-even” profit, then calculate the
lowest price it should enforce. [3]
c) Explain the economic rationale for enforcing the policy as mentioned in part b). [3]

5. STATE the relation between Price, Marginal Cost, Marginal Revenue of a profit
maximizing firm under the following alternative market organizations.
Part (a) is provided as an example.

a) Perfectly competitive market. Answer: Price= Marginal Revenue=Marginal Cost

b) Single price charging monopolist
c) Cournot Duopolist
d) Stackelberg leader
e) Stackelberg follower
f) Multi-market monopolist
g) Perfectly competitive market with increasing cost structure
h) Perfectly competitive market with decreasing cost structure [4]