1. 20 points TFU and Explain: a. (5 points)A Cournot duopoly is socially more op

Question

1. 20 points TFU and Explain: a. (5 points)A Cournot duopoly is socially more optimal than a cartel. b. (5 points) When preferences are in perfectly fixed proportions (perfect complements) there is no substitution effect in response to a price change. In "Coffee, Tea, or Tuition-Free?" Miller, Benjamin, and North (5 points) argue that while price discrimination is not fair, it is a necessary business practice. c. d. When the price of a good increases, the substitution effect always (5 points) reduces demand.

Explanation / Answer

1. True

In case of curnot dupoly output produced is more, prices are lower , profits are lower and hence welfare is higher. In cartel the firms behave as monopolist and thus output produced is less, prices charged is higher , profits are lower and hence soical welfare is much lower.

b) True

Because in case of fixed proportion preferences goods are conconsumed in fixed proportion and hence substitution effect is zero . Ex left shoe and right shoe.

c) True

Because tea , coffee have easily available substitutes as coffee is substitute for tea . Hence price discrimination is not fair but a necessary business strategy.

d) True

Substitution effect tells us rate at which one good is substituted for other if price of a good increases. Hence substitution effect tells us to consume good which has lower prices.

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