ECN 460/560, Fall 1997

Prof. Bruce Blonigen

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1) C
2) A
3) C
4) A
5) D
6) C

7) A) Homogeneous products, B) Few firms, C) Low rate of technological change, D) low market concentration, etc.

8) A) Homogeneous goods, B) Perfect information, C) Free entry/exit, D) No transactions costs, etc.

10) A) Firms make positive profits, B) Firms price above marginal cost.

11) A) Airline tickets, B) Movie theater tickets, C) Tuition at UO.

12) TFC = 0
TVC = Q³ - 50Q² + 750Q
ATC = Q² - 50Q + 750
AFC = 0
AVC = Q² - 50Q + 750
MC = 3Q² - 100Q + 750

13) At Q = 25:
AVC = (25)² - 50(25) + 750 = 125
MC = 3(25)² - 100(25) + 750 = 125

14) AVC is minimized when MC=AVC. Therefore, AVC is minimized when Q=25.

15) If the firm is maximizing profits, MR=MC. Here, since it is a perfect competitor Price should equal MC at Q=26

Check: Price = 178
MC = 3(26)² - 100(26) + 750 = 178

Profits=(Price - ATC)Q
=(178 - [(26)² - 50(26) + 750])26 = $1352

16)Since its perfectly competitive, Price = MC. Therefore, (Price - MC)/Price = 0 = Lerner index = -1/(price elasticity of demand). Therefore, the price elasticity of demand is infinite.

17) At Q=30, MC = 3(30)² - 100(30) + 750 = $450. If price is $350, then the firm is pricing below marginal cost which implies PREDATORY PRICING.

Profit = (Price-ATC)Q = (350 - [(30)² - 50(30) + 750])30
= (350 - 150)30 = $6000.

18)HHI before merger = 2*(8)² + 4*(21)² = 1892
HHI after merger = (16)² + 4*(21)² = 2020
The change in HHI is 128 which is less than 150, so allow merger.

26) LENA'S PROBLEM:
Choose Q_L to max Profit_L=(10 - Q_L - Q_S) Q_L - (6.5 + 2Q_L)
= 10 Q_L - (Q_L)² - Q_S Q_L - 6.5 - 2Q_L
= 8* Q_L - (Q_L)² - Q_S Q_L - 6.5
FOC: 8 - 2Q_L - Q_S = 0
Solving FOC we get Q_L=4 - 1/2Q_S
SVEN'S PROBLEM: Symmetrically identical, so one can solve to get Q_S=4 - 1/2 Q_L

27) Substitute Q_S into Q_L:
Q_L= 4 - 1/2(4 - 1/2Q_L)
Q_L = 2 + 1/4Q_L
3/4Q_L = 2
Q_L^*=8/3 or 2.67
Now substitute Q_L^* into expression for Q_S:
Q_S= 4 - (1/2)*(8/3)
Q_S= 4 - (4/3)
Q_S^* = 8/3 or 2.67
Market price = 10 - Q_L - Q_S
Price= 10 - (8/3) - (8/3)
Price = 14/3 or 4.67
Profit_L = Profit _S = (14/3)*(8/3) - 2*(8/3) - 6.5 = 0.64

28) No, because Lena has made no binding commitment to overproduce and her best strategy if Sven enters is to produce the Cournot Nash output (i.e., accommodate entry). In other words, the threat is not credible.

29) Q_L = 3. Therefore, Sven's maximization problem becomes:
Choose Q_L to max Profit_L=(10 - 3 - Q_S) Q_S - (6.5 + 2Q_S)
= 7Q_S - (Q_S)² - 6.5 - 2Q_S
= 5Q_L - (Q_S)² - 6.5
FOC: 5 - 2* Q_S = 0
Solving FOC we get Q_S=2.5
To see if Sven will enter the market we need to see if he can make positive profits:
Market price in this situation = 10 - 3 - 2.5 = 4.5
Therefore, Profit_S = 4.5*2.5 - 2*2.5 - 6.5 = -0.25
Negative profits means that Sven will not enter now that Lena has committed to producing 3 units.