ECON Multiple Problem Questions

1. (a) True or false: market demand is more elastic than residual demand.
This statement is False because

(b) Why are marginal costs increasing? Why are they not always constant? You may give examples in some industries or just state two reasons at least.

(c) A monopolist faces the industry demand Q=400-0.5 p and has constant marginal costs of 8, with no fixed costs.
a) (2.5 points) What is the monopoly price? What is the monopoly quantity?
b) (2.5 points) Without solving mathematically, just using economic theory based on the solution in a), if price drops such that quantity increases from the one in a), by one very small amount, would total revenue be higher?

2. Consider the market where there is product differentiation with two firms. The firms are choosing prices p1 and p2 and have demands given by
q1 = 40 - 0.5 p1 + p2
q2 = 60 - 2 p2 + p1
a) (10 points) Assuming zero marginal and zero fixed costs, what are the firms' best response functions, that is best price of firm 1 given price of firm 2, and best price of firm 2 given price of firm one.

b) (5 points) What are the equilibrium levels of prices, and then the resulting quantities, and profits? (do not set p1 equal to p2 as this is not necessarily the case, in a) you get two equations in two unknowns, so please solve for p1 and p2 here.)

c) (5 points) Why do the firms get different profits in b)? Don't they have the same costs? Please explain.

3. In a store, we displayed under the price tag whether the popcorn product was a low fat popcorn product. We were able to get data for before and after quantity sold for all popcorn products, in treatment and in two possible control stores. We also got data on the size of the  popcorn display shelf for all three stores in our data set as shown below. (2.5 points each a)  through d) below)
TABLE
Retail Low Fat Experiment: Summary Statistics
Treated
Store
110

Store C1

Store C2

100

230

Average
Quantity
After(*)

130

160

300

Square
footage of
popcorn
shelves

150

149

260

Average
Quantity
before(*)

The "Treatment Store" is the store where the intervention took place; the "Control Stores" are two nearby stores in the same retail chain, store C1 and store C2. Before period means weeks before experiment, after period means after experiment. (*) Average across weeks in Before and Average in Weeks in after period, respectively, average quantity sold is for all products sold e.g. week one 150 products are sold total, week 2 100, then average is 125 products).

a) Let C1 be the control. Give one reason as to why, given the table above, you choose that one and not the other to measure the effect of the experiment.

b) Compute the effect of our nutritional labels. What do you conclude: do people appear to
like having a low fat label as measured by the responses in total popcorn sold in the
above table?
c) Suppose in Store C1 there was new rent-a-DVD display added during that same period
we ran the experiment. What would be the problem of using C1 as a control.
d) Given the problem in c) you have to use C2 as a control. How would you use the
information available to normalize the data and have somewhat comparable units?