Economics 212
Microeconomic Principles
Due: 9 May 2012 †
Problem Set No. 4
Name________________________________
Instructor: Brian B. Young
The value of this problem set is 25 points
Please show your work where appropriate!
#1 (5 pts)
Firm 1’s strategies
Coupon
No
coupon
Firm 2’s
strategies
N o coupon
$150
$130
B
A
$60
$100
$100
$75
C
Coupon
$95
D
$125
Two competing firms in a duopoly must decide whether or not to offer consumers a
coupon for their good. The payoff matrix above represents the daily profit available
to the firms under the different coupon strategies.
a. What strategies and payoffs are represented by quadrant A?
b. What strategy will Firm 1 pursue if it believes that Firm 2 is offering a coupon?
c. What quadrant represents the equilibrium that will result if the firms act
independently (compete)?
d. What quadrant represents the equilibrium that will result if the firms
successfully collude?
#2 (5 pts)
How does a firm in monopolistic competition determine its price and quantity? What
type of profit can it earn in the short run and the long run?
#3 (5 pts)
In the above figure, draw and label the demand and cost curves of a monopoly. Identify
the quantity a single-price monopoly will produce by labeling it Qm and identify the
price by labeling it Pm.
#4 (5 pts)
In the figure above, complete the graph of the electric utility company by adding the
marginal revenue and marginal cost curves. Assume the marginal cost is constant at 4¢
per kilowatt-hour. Now discuss the two options regulators have in trying to regulate
the firm. Be sure to state the price and quantity that are selected for each option. Also,
what price and quantity does the firm select if it is not regulated?
#5 (5 pts)
Fill in the blanks in the following table describing industrial organization market
structures:
Perfect
Monopolistic
Oligopoly
Competition Competition
Number of
Firms
HerfindahlHirschman
Index
Pricing Power
Product
Differentiation
Very Few
< 1800
Price Taker
Yes
No (unless
there is
perfect price
discrimination)
“Efficient”
Output Level
Elasticity of
Demand
Monopoly
Perfectly
Elastic
† Problem Set No. 4 is due no later than 9PM, 9-May-2012 in CL-15.