Question

1. Show that if there is only one producer of good x and that all other markets are perfectly competitive, resources will be inefficiently allocated in general equilibrium. Hint: Compare the MST with MRP T at the monopoly outcome. Show in the graph that monopolist produces too little of good x and that if a consumer could directly control the allocation of resources, she could make herself better off (and no one worse off).

2. In the book trade, it is common practice to publish a novel in hardcover and sell it for $35 and then to bring a paperback edition 1/2 year later and sell it for $12.50. The motion picture industry uses a similar strategy. A new movie might be screened at first-run movie theatres for about few months before it becomes available on DVDs. Explain these curious practices.

3. Two Cournot duopolists produce in a market with demand . The marginal cost for firm 1 is constant and equals 10. The marginal cost for firm 2 is also constant and equals 25. The two firms want to merge. They argue for the merger on the grounds that marginal production costs would fall to 10 for all units of output after the merger, since all production would be at the low marginal cost. Given this information, would you recommend the merger? Explain by calculating the benefits and costs from the merger.

Answer 1