1. The following graph shows a firm with a kinked demand curve. a. What assumpti
ID: 1199403 • Letter: 1
Question
1. The following graph shows a firm with a kinked demand curve.
a. What assumption lies behind the shape of this demand curve?
b. Identify the firm’s profit-maximizing output and price.
c. Use the graph to explain why the firm’s price is likely to remain the same, even if marginal costs change.
3. Some games of strategy are cooperative. One example is deciding which side of the road to drive on. It doesn’t matter which side it is, as long as everyone chooses the same side. Otherwise, everyone may get hurt.
a. Does either player have a dominant strategy?
b. Is there a Nash equilibrium in this game? Explain.
c. Why is this called a cooperative game?
5. A monopolist has a constant marginal and average cost of $10 and faces a demand curve of QD = 1000 – 10P. Marginal revenue is given by MR = 100 – 1/5Q.
a. Calculate the monopolist’s profit-maximizing quantity, price, and profit.
b. Now suppose that the monopolist fears entry, but thinks that other firms could produce the product at a cost of $15 per unit (constant marginal and average cost) and that many firms could potentially enter. How could the monopolist attempt to deter entry, and what would the monopolist’s quantity and profit be now?
c. Should the monopolist try to deter entry by setting a limit price?
Explanation / Answer
1.a) Assumption behind the kinked demand curve is that if a firm charges a price higher than what is at the kink, the demand will be more elastic as no other firm will follow it. But if it charges price lower than at the kink, demand will be more elastic as other firms would also follow.
b) profit maximizing output is at the kink. Firms should charge the price as at the kink because no firm will have an incentive to move from there.
c) As long as MC is on the dotted part of MR firms will have no incentive to change output.
3 a) No player has dominant strategy in this.
b) There are two nash equilibrium (left,left) and (right,right).
c) This is called cooperative game because even if one player does not cooperate both will suffer, thus it is cooperative game which maximizes total payoff.
5. a) MR =MC
100 - 1/5Q = 10
Q* = 450
P* = 55
Profit = 24750 - 4500 = $20,250
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