# You are the manager of a business in a monopoly market

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Questions

You are the manager of a business in a monopoly market with the following inverse demand function

"p = 30 " "1" /"10" "q"

In addition, assume your production technology is described by the total cost function

C(q) = 500 10q

Determine the optimal quantity to produce (qM), the price you should charge for your product (pM), and compute the profit of your business.

Provide an intuitive explanation of market power. What is market power? How do we measure the market power of a business? Compute the market power of your business.

What determines the market power of a business? Explain.

Firm 1 and Firm 2 compete in an industry and must decide whether to introduce an upgrade to their existing products. The nature of the strategic interaction is described by the game box, where (Y) means “upgrade” and (N) means “do not upgrade”. The upgrade is costly and may or may not be a good business decision.

Assume Firm 1 and Firm 2 move simultaneously. Derive the NASH equilibrium of this game.

Assume Firm 1 and Firm 2 move sequentially. In particular, Firm 1 makes the initial move and decides whether to introduce the upgrade. Then, Firm 2 observes the decision of Firm 1 and decides whether to introduce the upgrade.

Determine the subgame perfect NASH equilibrium of this game.

A business can produce its product in different versions: Version A has a basic design and a lower cost and Version B has an upgraded design and a higher cost of production. The business knows there are different types of customers, “High” demand (H) and “Low” demand (L), but cannot separate the different types of customers. The number of customers of each type and the maximum each type is willing to pay for the different versions of the product are illustrated in the table. In addition, the table gives the marginal cost of production for each version of the product.

Number Type Version A Version B

50 H 30 45

100 L 20 25

Marginal Cost 10 20

Assume the business offers the product in Version A only. Determine the optimal price (P_A^*) and compute the profit of the business.

Assume the business offers the product in Version A and Version B. Determine the optimal prices (P_A^* and P_B^*) and compute the profit of the business.

For each of the following terms, provide an intuitive explanation and discuss its economic implications.

Product Differentiation: What is it? How does it affect competition?

Network Market: What is it? What is the nature of the equilibrium in a network market? Why has Windows been able to maintain a monopoly position in the market for operating systems?

Provide an intuitive explanation of the Principal-Agent problem and discuss any mechanisms used to mitigate the problem. You should use the business owner-manager problem as an illustration.

Provide and intuitive explanation of the Adverse Selection problem and discuss its implications. You should use the health insurance industry as an illustration.

Assume the demand for the product of a monopoly is given by the function q =100p3/2. If the cost function of the monopoly is C(q) = 10q, the optimal price for the monopoly is

20

25

30

35

- 10 years ago

**You are the manager of a business in a monopoly market**

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