intermediate theory of economic

ECON 3113 Assignment One

Due on Feb 3, 2016

1. Suppose there are two potential customers in the market. One has demand function

ppD 10)( 1

. The other has demand function ppD 220)( 2

 . The only firm in this

market has constant marginal cost of 2.

(1) Draw the two demand curves in a graph, with price on the vertical axis and demand on the horizontal axis.

(2) (3 rd

-degree price discrimination) If the monopoly can identify the two consumers

and charge different prices to them, what is the optimal price charged to each

consumer? At the optimal prices, is there a relationship between price and

elasticity of demand?

2. Suppose there are two firms competing in a market. Both firms produce identical

products. Firm One is an efficient firm and has total cost function 11

5qC  ; Firm Two is

a less efficient firm and has total cost function 22

10qC  . Market demand for this

product is given by pQ 2150  .

If two firms compete in quantities of production, find out the best response function of

each firm and the equilibrium output level of each firm.

3. Two firms compete in prices in a market for a homogeneous product. In this market

there are N consumers; each buys one unit from the firm selling at a lower price, as long

as the price does not exceed $10. In case both firms charge the same price, assume that

N/2 consumers buy from each firm.

(1) Assume zero production cost for both firms. Find the Bertrand equilibrium prices

for a simultaneous-move game.

(2) Suppose that the unit production cost of firm 2 is $4, but the unit cost of firm 1

remains zero. Find the Bertrand equilibrium prices for the simultaneous-move

game.