471 Assignment 1
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09#20#2012 # AHW 1 ECON 471 – Fall 2012 – Assignment 1 Due October 2, 2012 (In Class) While working with your classmates may be beneficial and is encouraged, I take a very dim view of identical assignments. You should assume that a person reviewing your answers has no previous knowledge of economics. As such, your answers must be coherent, intelligible and comprehensive. All graphs should be graphed to scale, clearly labelled and easy to understand. Please consult your course notes and the text prior to attempting any given question. Question 1 (Short Answer) Answer the following questions making use of whatever tools (diagrams, etc.) you feel are appropriate. Please limit your responses to one page per short answer. a) Explain why a “monopolist” defined as “the only supplier of a product” may not be (necessarily) able to exert market power. b) What is the difference between monopoly rents and Ricardian rents? c) Explain the factors that determine the extent to which a firm engaged in Cournot competition may be able to exert market power. d) Use a diagram to evaluate the following statement: “… no merger to monopoly could ever, by definition, bring about gains in efficiency that offset the effects of the merger on competition.” Question 2 The (inverse) demand curve for a market is given by: ! ! = ! − ! There are two firms (!, !) present in this market, such that: ! = ! ! + ! ! Each firm ! (where ! = !, !) has a cost function represented by: ! ! ! = ! ! ! + ! ! a) If each firm competes over quantities in this market, find the equilibrium quantities for each firm. b) Find the equilibrium profits for each firm. c) Suppose that firms collude in this market (evenly splitting output). Find the collusive outputs and profits for each firm. d) Again, suppose the firms collude and evenly split output. What is the marginal cost and marginal revenue for each firm? What do these values suggest about the stability of the collusive agreement? e) If firm ! is certain that firm ! will honour the collusive agreement, what level of output will firm ! choose? What are the resulting profits for firm ! and ! under this scenario?
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Econ 471 Assignment 1
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09#20#2012&#&AHW& 1&
ECON%471%–%Fall%2012%–%Assignment%1%%Due%October%2,%2012%(In%Class)%%While&working&with&your&classmates&may&be&beneficial&and&is&encouraged,&I&take&a&very&dim&view&of&identical&assignments.&&You&should&assume&that&a&person&reviewing&your&answers&has&no&previous&knowledge&of&economics.&&As&such,&your&answers&must&be&coherent,&intelligible&and&comprehensive.&&All&graphs&should&be&graphed&to&scale,&clearly&labelled&and&easy&to&understand.&&Please&consult&your&course¬es&and&the&text&prior&to&attempting&any&given&question.&%%Question%1%(Short%Answer)%%Answer&the&following&questions&making&use&of&whatever&tools&(diagrams,&etc.)&you&feel&are&appropriate.&Please&limit&your&responses&to&one&page&per&short&answer.&%
a) Explain&why&a&“monopolist”&defined&as&“the&only&supplier&of&a&product”&may¬&be&(necessarily)&able&to&exert&market&power.&
b) What&is&the&difference&between&monopoly&rents&and&Ricardian&rents?&c) Explain&the&factors&that&determine&the&extent&to&which&a&firm&engaged&in&
Cournot&competition&may&be&able&to&exert&market&power.&d) Use&a&diagram&to&evaluate&the&following&statement:&“…&no&merger&to&
monopoly&could&ever,&by&definition,&bring&about&gains&in&efficiency&that&offset&the&effects&of&the&merger&on&competition.”&
%%Question%2%%The&(inverse)&demand&curve&for&a&market&is&given&by:&&! ! = ! − !&There&are&two&firms&(!, !)&present&in&this&market,&such&that:&&! = !! + !!&Each&firm&!&(where&! = !, !)&has&a&cost&function&represented&by:&! !! = !!! + !! &&
a) If&each&firm&competes&over&quantities&in&this&market,&find&the&equilibrium&quantities&for&each&firm.&
b) Find&the&equilibrium&profits&for&each&firm.&c) Suppose&that&firms&collude&in&this&market&(evenly&splitting&output).&Find&
the&collusive&outputs&and&profits&for&each&firm.&d) Again,&suppose&the&firms&collude&and&evenly&split&output.&What&is&the&
marginal&cost&and&marginal&revenue&for&each&firm?&&What&do&these&values&suggest&about&the&stability&of&the&collusive&agreement?&
e) If&firm&!&is&certain&that&firm&!&will&honour&the&collusive&agreement,&what&level&of&output&will&firm&!&choose?&What&are&the&resulting&profits&for&firm&!&and&!&under&this&scenario?&
09#20#2012&#&AHW& 2&
&Question%3&&The&(inverse)&demand&curve&for&a&market&is&given&by:&&! ! = ! − !&There&are&three&firms&engaged&in&quantity&competition&present&in&this&market.&Each&has&a&cost&function&represented&by:&&! !! = !!!! &&
a) Solve&for&the&three&best&response&functions&in&terms&of&the&other&firms’&output.&For&instance&solve&for&!! = !!(!!, !!)&etc.&
b) Solve&for&the&Cournot&equilibrium&quantities&(e.g.&!!∗, !!∗ , !!∗&in&terms&of&the¶meters).&
c) Suppose&that&!! = 2, !! = 3, !! = 4.&Evaluate&the&Cournot&equilibrium&quantities&and&find&the&equilibrium&profits&for&each&firm.&
d) Suppose&that&firm&2&merges&with&firm&3&and&that&entry&by&other&firms&is&prohibited&in&this&market.&The&new&merged&firm,&denoted&!,&is&able&to&produce&its&entire&output&using&firm&2’s&technology&(and&is&therefore&subject&to&firm&2’s&cost&function).&What&are&the&new&output&quantities&and&profits&for&the&merged&firm&and&for&firm&1?&
e) Are&consumers&made&better&off&by&this&merger?&Explain.&&
&Question%4&&Consider&the&following&game:&&&&&&&%%
a) Find&the&pure&strategy&Nash&equilibria&for&this&game.&b) What&is&the&set&of&rationalizable&strategies&for&this&game?&c) What&is&the&“most&likely”&equilibrium&for&this&game?&Explain.&
&%% %
7,7& 1,8& 2,6& 7,7&6,1& 2,3& 4,4& 0,3&8,2& 0,0& 3,3& 1,5&7,4& 5,5& 3,2& 4,3&
&&&&A&&&&&&&&&&&&&B&&&&&&&&&&&&C&&&&&&&&&&&&&&D&a&b&c&d&
09#20#2012&#&AHW& 3&
Question%5&&Consider&the&following&information&about&wireless&subscriber&market&&shares&for&Alberta,&Quebec&and&Saskatchewan&for&20111&&Province%
Bell%Group%
Telus% Rogers%New%
Entrants%SaskTel%
Alberta% 22%& 49%& 26%& 2%& 0%&Quebec% 34%& 28%& 31%& 7%& 0%&
Saskatchewan% 8%& 8%& 13%& 0%& 72%&&&a)&Calculate&the&!!"&and&!"!&for&each&province&(for&these&calculations,&assume&the&share&for&“New&Entrants”&represents&a&single&firm).&&b)&Which&province&has&the&most&highly&concentrated&wireless&market?&&Explain.&&&&&&&&&&&&&&&&&&&&&&&
&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&1&Selected&values&drawn&from&“Table&5.5.5&–&Wireless&subscriber&market&share,&by&province&(2011)”&&CRTC&–&Communications&Monitoring&Report&2012&http://www.crtc.gc.ca/eng/publications/reports/policymonitoring/2012/cmr2012.pdf& &
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