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eco2_-_homework.docNAME _______________________________________ PROBLEM SET 2
1. Assume the competitive market shown below faces a short run price of $10. Using the graph below, identify the following:
Profit maximizing output: _______________________
Is the firm in shown in this graph making a profit? How do you know this?
In the long run, the price falls to $7.50. Why does this happen?
What is the new profit maximizing output? _______________________
10
20
30
40
50
60
70
80
90
100
110
120
130
$0.00
$2.50
$5.00
$7.50
$10.00
$12.50
Quantity
P=MR
MC
ATC
P
r
i
c
e
,
C
o
s
t
2. What is the profit maximizing output of this monopolist? _______________________
What price do they set? _______________________
Provide two reasons why this price is not likely to fall.
a.
b.
10
20
30
40
50
0
2
4
6
8
10
Output per day
D
MC
MR
ATC
P
r
i
c
e
Can a monopolist charge any price they wish? Why or why not?
3. Use the production function below to answer the following questions:
|
Units of Labor |
Total Output |
MP |
|
0 |
0 |
|
|
1 |
5 |
|
|
2 |
15 |
|
|
3 |
30 |
|
|
4 |
42 |
|
|
5 |
52 |
|
|
6 |
60 |
|
|
7 |
65 |
|
|
8 |
67 |
|
|
9 |
63 |
|
|
10 |
55 |
|
a. Calculate marginal productivity (MP) – put this in the table
b. At what level of employment does diminishing marginal productivity begin?
c. At what level of employment does marginal productivity become negative?
d. Why does marginal product become negative?
4. Use the data in the table about Homer’s Donuts to answer the questions below:
|
Number of workers |
Total Output |
Total Revenue |
Value of the marginal product of labor |
|
0 |
0 |
|
|
|
1 |
40 |
|
|
|
2 |
70 |
|
|
|
3 |
90 |
|
|
|
4 |
100 |
|
|
|
5 |
105 |
|
|
|
6 |
107 |
|
|
|
7 |
105 |
|
|
a. Complete the table assuming a price of $1.00.
b. Assuming the price of donuts is $1.00, and the market wage is $8 an hour, what is the maximum number of workers Homer will hire?
__________________________
c. If the price of donuts rises to $2.00 and wages stay the same, how many workers will Homer’s Donuts hire?
__________________________
5. Assume the following game is played one time only. Based on the information in the payoff matrix, PNC Bank and Citizens Bank are considering an implicit collusive agreement on interest rates. Payoffs to the two firms are represented in terms of profits in thousands of dollars. PNC’s payoffs appear first.
|
|
|
Citizens Bank |
|
|
|
|
Collude: Raise Rates |
Defect: Keep Rates where they are |
|
PNC |
Collude: Raise Rates |
(900, 600) |
(700, 800) |
|
|
Defect: Keep Rates where they are |
(1100, 300) |
(800,400) |
a. Does PNC have a dominant strategy? What is it? Does Citizens have a dominant strategy? What is it?
b. Solve for the Nash equilibrium.
c. Does the result of your answer change if the game is played an infinite number of times? Why or why not. Properly use game theoretic terminology in your answer.
