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POE Problemset7

1. This document contains the solutions to economics problems. 2. It states that for a firm in a monopolistically competitive market to lower its price, all firms must lower their prices due to facing downward sloping demand curves. 3. It provides the solution to a multiple choice question stating that accounting profit is zero in the short run.

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Duc Chinh Luong
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38 views2 pages

POE Problemset7

1. This document contains the solutions to economics problems. 2. It states that for a firm in a monopolistically competitive market to lower its price, all firms must lower their prices due to facing downward sloping demand curves. 3. It provides the solution to a multiple choice question stating that accounting profit is zero in the short run.

Uploaded by

Duc Chinh Luong
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Trung Dung Ngo 18823377

1.
2. If do so they have to lower their price because each firm in a monopolistically
competitive market faces a downward sloping demand curve.
3. FALSE. Because the accounting profit is zero.
4. Choose A because in short run, P > AVC but in long-run, P<ATC
5. a and b
Quantit
Price y TR MR MC
50 0 0    
40 5 200 40 10
30 10 300 20 10
20 20 400 10 10
15 30 450 5 10
10 50 500 2.5 10
0.19230
5 102 510 8 10
2.5 200 500 -0.10204 10
c. Max’s profit-maximising is at (P,Q) =(20,20), at this point MR and MC make an
intersection.
8.

a, Jestar: Nothing is strictly dominated by Low Price => eliminate Nothing


More Advertising is strictly dominated by Low Price => eliminate More Advertising
Virgin Blue: Nothing is strictly dominated by Low Price => eliminate Nothing
More Advertising is strictly dominated by Low Price => eliminate More Advertising
b. In the full game:
Jestar: Nothing is strictly dominated by Low Price
More Advertising is strictly dominated by Low Price
Virgin Blue: Nothing is strictly dominated by Low Price
More Advertising is strictly dominated by Low Price
c. According to the answer in a and b, Jestar and Virgin Blue absolutely play Low Price
Trung Dung Ngo 18823377

=> The equilibrium outome is (Low Price, Low Price)=(3,3)


d. The pure strategy Nash equilibrium is (Low Price, Low Price)=(3,3)
e. If two firms cooperate with each other, they will get a better outcome which is (5,5). It
means that they both doing nothing.
f. They are not able to cooperate with each other. Because the priority of a firm is
maximizing their profit. So, if Virgin Blue play Nothing, Jestar will play Low Price in
which they get a highest payoff is 8.
g. If the firms play game repeatedly, the equilibrium outcome is still the same which is
(Low, Low)=(3,3).

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