Economics – Market structures

1. SIM corporation manufactures and sells a line of tablets with the total cost as TC = 800 + 40Q + Q2. Firm’s
objective is to maximize profit. There are two cases
- SIM is a perfect competitive firm in which market price is P = 160
- SIM is a monopoly firm in which market demand is P = 300  Q
a. Express ATC, AVC, AFC, MC in term of Q.
b. Express total profits () in terms of Q for each case
c. In each case, what level of output are total profits maximized? What price will be charged? What is revenue,
what is profit?
d. For the case of monopoly, what level of output that gives maximum revenue, what is the price and revenue.
e. Compare and analyse the results

2. Given profit maximizing monopoly firm with total cost TC = 300 + 20Q + 2Q2. Market demand is P = 200-Q. Find
the profit maximizing Quantity, price, Total revenue and Profit.

3. Given firm with total cost TC = 300 + 20Q + 2Q2. Market price is 120 Find the profit maximizing Quantity, price,
Total revenue and Profit.

4. In this payoff matrix for the location strategies of companies for the only Mega
two supermarket at the local province. The payoff (15,17) means that Super
profit is 15 and 17 for Mega respectively. Super Area A Area B
a. Find the dominant strategy for each company (if any), briefly explain.
b. Find the Nash Equilibrium (if any). Is it a prisoner’s dilema? Area A 15, 17 12,13
c. If Mega has the right to go first, what is the choice and final equilibrium?
Area B 10,12 18,16
d. If Super has the right to go first, what is the choice and final equilibrium?

5. Imagine that two oil companies, BQ and Exxoff, own adjacent oil fields. Under the fields is a common pool of
oil worth $144 million. Drilling a well to recover oil costs $5 million per well. If each company drills one well,
each will get half of the oil and earn a $67 million profit ($72 million in revenue - $5 million in costs). Assume
that having X percent of the total wells means that a company will collect X percent of the total revenue. If BQ
and Exxoff are able to successfully cooperate to maximize their joint profits, how much each firm will earn?
Find the dominant strategy of each firm, what is Nash equilibrium
Quantity Price Revenue Profit Rochelle and Alec, own wells that produce safe drinking water. They bring
0 $60 $0 the water to town and sell it at whatever price the market will bear.
Suppose that Rochelle and Alec can pump as much water as they
100 55 5,500 want without cost so that the marginal cost of water equals zero.
200 50 10,000 5.1 If Two firms operate as a profit-maximizing monopoly in the
300 45 13,500 market, what price will they charge?
400 40 16,000 a. $25 b. $30 c. $35 d. $40
5.2 If two firms operate as a profit-maximizing monopoly in the
500 35 17,500
market, how much profit will each of them earn?
600 30 18,000 a. $8,050 b. $8,500 c. $9,000 d. $18,000
700 25 17,500 5.3 If they are unable to cooperate. What will be the price once
800 20 16,000 Rochelle and Alec reach a Nash equilibrium?
900 15 13,500 a. $15 b. $20 c. $25 d. $30
5.4 How many gallons of water will be produced and sold once
1,000 10 10,000
Rochelle and Alec reach a Nash equilibrium?
1,100 5 5,500 a. 600 b. 700 c. 800 d. 900
1,200 0 0
 Quantity Price Revenue Profit 6. There are two cable TV, each digital cable TV operator pays a
fixed cost of $200,000 (per year) and that the marginal cost of
0 $180 0
providing the premium channel service to a household is zero.
3,000 $150 $450.000 a. If they are able to COLLUDE on the quantity of subscriptions,
then their agreement will stipulate that each firm will charge
6,000 $120 $720.000 price and quantity of subscriptions at
9,000 $ 90 $810.000 a.. P= $90, Q= 4,500 b. P= $90, Q= 9,000
c. P= $120, Q= 3,000 d. P= $150, Q= 1,500
12,000 $ 60 $720.000
b. If they are able to COLLUDE on the quantity of subscriptions.
15,000 $ 30 $450.000 How much profit will EACH COMPANY earn?
18,000 $ 0 $0 a. $610,000 b. $550,000
c. $405,000 d.. $205,000

Goviet 7. Grab and Goviet are the only bus services in a small town. Each
Company can choose to set a high price or a low price for service
Low Price High Price due to limited choice of transportation. The payoff matrix below
shows the daily profits for each combination of prices. In the
Grab Low Price 75,80 95,75 payoff matrix (X,Y), the first entry shows Grab’s profits, and the
second entry shows Goviet’s profits. Assuming that both
High Price 80,90 98,102
companies know the information shown in the matrix.
a. Discuss whether both players have or do not have a dominant strategy.
b. Find Nash equilibrium (if any). Is this a prisoner’s dilemma game?
c. If Grab has the right to set price first, what will be the result. If Goviet has the right to set price first, find the result.
d. The town government is concerned that the transportation cost are too high. It decides to give a daily subsidy of 10 to
any company that chooses to set a low price. Redraw the payoff matrix under the government subsidy system. Find
the dominant strategy (if any) and the Nash equilibrium (if any). Discuss the effectiveness of such subsidy policy?

8. The information in the table below shows the total 8.2 If they are able to collude on the quantity of
demand for internet radio subscriptions in a subscriptions that will be sold and on the price
small urban market. Assume that each company that will be charged for subscriptions, then their
that provides these subscriptions incurs an agreement will stipulate that each firm will
annual fixed cost of $20,000 (per year) and that a. charge a price of $40 and sell 1,500 subscriptions.
the marginal cost of providing an additional b. charge a price of $40 and sell 3,000 subscriptions.
subscription is always $16.
c. charge a price of $32 and sell 2,000 subscriptions.
Quantity Price Cost Revenue Profit d. charge a price of $20 and sell 3,000 subscriptions.
8.3 Further assume that they are able to collude on
1,500 $52 the quantity of subscriptions that will be sold. If
the firms divide the market evenly, how much
2,000 $48 profit will each company earn?
25,00 $44 a. $10,000
b. $12,000
3,000 $40 c. $16,000
d. $20,000
3,500 $36 8.4 Further assume that they are not able to collude
on the price and quantity of subscriptions to sell.
4,000 $32 How many subscriptions will be sold altogether
when this market reaches a Nash equilibrium?
4,500 $28
a. 2,000
5,000 $24 b. 3,000
c. 4,000
5,500 $20 d. 5,000
6,000 $16 8.5 Further assume that they are not able to collude
on the price and quantity of subscriptions to sell.
8.1 Suppose there is only one internet radio provider How much profit will each firm earn when this
in this market and it seeks to maximize its profit. market reaches a Nash equilibrium?
The company will a. $12,000
a. sell 2,000 subscriptions and charge a price of $48. b. $16,000
b. sell 3,000 subscriptions and charge a price of $40. c. $52,000
c. sell 4,000 subscriptions and charge a price of $32. d. $64,000
d. sell 5,000 subscriptions and charge a price of $24.
9. Two discount superstores (Ultimate Saver and SuperDuper Saver area are interested in expanding their
market share. Both are interested in expanding the new areas to accommodate potential growth in their
customer base. The following game depicts the strategic outcomes that result from the game. Growth-related
profits of the two discount superstores under two scenarios are reflected in the table below.

SuperDuper Saver
Area A Area B

Area A SuperDuper Saver = $55 SuperDuper Saver = $70

Ultimate Saver = $60 Ultimate Saver = $55

Area B SuperDuper Saver = $60 SuperDuper Saver = $75

a. Find the dominant strategy for each company (if any), briefly explain. (4)
b. Find the Nash Equilibrium (if any), briefly explain. (2)
c. Area A is a remote area, local government wants both firms invest in Area A. It decides to give a subsidy of
$20 to any shop that chooses to invest in Area A. Redraw the payoff matrix under the government subsidy
system. Redraw the matrix and answer the question (a) and (b) again (2). Would companies choose to invest
in Area A or B (2)? Explain using specific values from your redrawn matrix.

10. The information in the table below shows the total a. charge a price of $40 and sell 1,500 subscriptions.
demand for internet radio subscriptions in a b. charge a price of $40 and sell 3,000 subscriptions.
small urban market. Assume that each company c. charge a price of $32 and sell 2,000 subscriptions.
that provides these subscriptions incurs an d. charge a price of $20 and sell 3,000 subscriptions.
annual fixed cost of $20,000 (per year) and that
10.3 Further assume that they are able to collude on
the marginal cost of providing an additional
the quantity of subscriptions that will be sold. If
subscription is always $16.
the firms divide the market evenly, how much
Quantity Price Cost Revenue Profit profit will each company earn?
1,500 $52 a. $10,000
2,000 $48 b. $12,000
25,00 $44 c. $16,000
3,000 $40 d. $20,000
3,500 $36 10.4 Further assume that they are not able to collude
on the price and quantity of subscriptions to sell.
4,000 $32
How many subscriptions will be sold altogether
4,500 $28 when this market reaches a Nash equilibrium?
5,000 $24 a. 2,000
5,500 $20 b. 3,000
6,000 $16 c. 4,000
10.1 Suppose there is only one internet radio provider d. 5,000
in this market and it seeks to maximize its profit. 10.5 Further assume that they are not able to collude
The company will on the price and quantity of subscriptions to sell.
a. sell 2,000 subscriptions and charge a price of $48. How much profit will each firm earn when this
market reaches a Nash equilibrium?
b. sell 3,000 subscriptions and charge a price of $40.
c. sell 4,000 subscriptions and charge a price of $32. a. $12,000
d. sell 5,000 subscriptions and charge a price of $24. b. $16,000
c. $52,000
10.2 If they are able to collude on the quantity of
subscriptions that will be sold and on the price d. $64,000
that will be charged for subscriptions, then their
agreement will stipulate that each firm will