Question

Robert treats coffee and creamer as perfect complements and has very specific requirements for the ratio of creamer to coffee. He will drink coffee only if he has exactly 3.00 packets of creamer for every cup of coffee. Coffee is priced at $3.00 per cup and creamer at $0.25 per packet. a. Suppose that Robert has $45.00 to spend on coffee and creamer. Find his optimal consumption bundle of coffee cups and creamer packets. b. Now, suppose that the price of creamer rises to $0.50 per packet. What is the substitution effect of this price change? Explain your answer.

7. Jamal consumes only two goods: lollipops and chewing gum. He treats these two goods as perfect substitutes, with one lollipop being a perfect substitute for a pack of chewing gum. Initially, the price of a lollipop is $0.10, while packs of chewing gum are $0.25 each. Jamal has $20 per week to spend on these two goods. Suppose the price of chewing gum decreases to $0.15. What is the substitution and income effect associated with the change in the price of chewing gum? Explain your answer.

8. Two firms compete (quantity competition) as Stackelberg duopolists in a market with inverse demand given by p=272.00−2Q, where p is the per-unit price, qi is the output for Firm i (either Firm 1 or 2), and Q=q1+q2. Firm 1 is the leader in this market. Firm 1 has a constant marginal cost of $4 per unit, and Firm 2 has a constant marginal cost of $8 per unit. Assume no fixed costs. Find the equilibrium outputs, price and profits for the two firms. Show the working.

9. Consider a market served by two firms: firm A and firm B. Demand for the good is given (in inverse form) by P(Q)=250−Q, where Q is total quantity in the market (and is the sum of firm A's output, qA, and firm B's output, qB) and P is the price of the good. Each firm has a cost function of c(q)=10.00q, which implies marginal cost of $10.00 for each firm, and the goods sold by firms A and B are identical. a. If the two firms compete in price (Bertrand competition) then find the price each of them will set. How much quantity will be sold? What is the profit for each firm? (3) b. Now suppose that the two firms compete by setting quantities (Cournot competition). Find the output each of them will set. What will be the price of the good? What will be the profit for each firm? (4) c. Now suppose instead of competing, the two firms agree to collude, form a cartel and becomes monopoly. What price the good will be sold? What is the profit? If the firms share the profit equally; is each firm better or worse off compared to their respective profits in (a) and (b)?

10. Firm 1 and firm 2 are Bertrand duopolists (price competition). Firm 1 has a marginal cost of $3.00 per unit, and firm 2 has a marginal cost of $5 per unit. The demand for their product is p=72.00−Q, where Q is the total quantity demanded. How much does each firm sell in equilibrium? What are profits of each firm in equilibrium?

Answer 1

answered by: anonymous