(10 total points) Suppose a monopolist faces the following demand curve: P = 90

Question

(10 total points)

Suppose a monopolist faces the following demand curve:

P = 90 %u2013 2Q. Marginal cost of production is constant and equal to $10, and there are no fixed costs.

A) (2 points) What is the monopolist%u2019s profit maximizing level of output?
B) (2 points) What price will the profit maximizing monopolist charge?
C) (2 points) How much profit will the monopolist make if she maximizes her profit?
D) (2 points) What is the value of consumer surplus?
E) (2 points) What is the value of the deadweight loss created by this monopoly?

Explanation / Answer

A) (1 point) Does player A have a dominant strategy, and if so what is it?

No. Player 1 chooses Top if Player 2 chooses Left. Player 1 chooses bottom if Player 2 chooses Right.
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B) (1 point) Does player B have a dominant strategy and if so what is it?

No. Player 2 chooses Left if player 1 chooses Top. Player 2 chooses Right if player 2 chooses Bottom.
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C) For each of the following say True if the strategy combination is a Nash equilibrium, and False if it is not a Nash equilibrium:

i) Yes. Neither player will want to deviate.

ii) No. Both players wish to deviate.

iii) No. Both players wish to deviate.

iv) Yes. Neither player will want to deviate.

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