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microeconomics

Questions and Answers of Microeconomics

Explain why p1 5 p2 5 1 for both consumers in the absence of subsidies for giving to the public good.
What is y* if there are N rather than 2 consumers of the type described in our example (i.e., with the same Cobb–Douglas tastes but different incomes)? What if everyone’s income is also the same?
Explain the constraint y 5 f 1X 2 gxn 2.
Can you think of a case where the mechanism results in an outcome under which the city needs to come up with more money than the cost of the streetlight in order to implement the mechanism?
Can you think of a case where our simple mechanism generates sufficient revenues to pay for the streetlight?
Suppose you have a piece of art that you would like to give to the person who values it the most but you do not know people’s tastes. Explain how a second-price sealed bid auction (as described in
Suppose my warm glow from demonstrating in the streets (for some worthy cause) depends on how much you demonstrate in the streets and vice versa. Letting the fraction of our time spent demonstrating
Can you use the “warm glow effect” to explain why government contributions to public goods (such as public radio) do not fully crowd out private contributions?
Explain how it is rational for me to give to both relieving poverty in the developing world and to alzheimer’s research in the presence of “warm glow” but not in its absence.
Can you think of the provision of free access to swimming pools in condominium complexes in a way that is analogous to Coase’s findings about lighthouses?
In recent years, gated communities that provide local security services privately have emerged in many metropolitan areas that are growing quickly. Can you think of these from “club” perspective?
Why do consumers not face the same incentive to lie about their tastes in such a “Tiebout” equilibrium as they do in a Lindahl equilibrium?
Consider the entrance fees to movie theaters on days when not every seat in the movie theater fills up. If it is generally true that older people and students have lower demand for watching new
Does the producer collect enough revenues under such individualized pricing to cover marginal costs?
Illustrate, using a graph of two different demand curves for two different consumers, how a producer would calculate y* and what prices she would charge to each individual in order to get him to in
Can you think of other goods that are non-rivalrous (at least to some extent) but also excludable?
If the only way to finance the subsidy for private giving is through distortionary taxation, would you expect the optimal subsidy to be larger or smaller than if the subsidy can be financed through
True or False: Under an income tax that has increasing marginal tax rates as income goes up, the rich get a bigger per-dollar subsidy for charitable giving than the poor when charitable giving is tax
Could the government induce production of the efficient level of fireworks if it only subsidized the purchases of one of the consumers?
In Section B, we show mathematically that the optimal subsidy will involve the government paying for half the cost of the fireworks if you and I have the same preferences. By thinking about the size
f a particular public good is subject to some partial “crowd-out” when governments contribute to its provision, might it be optimal for the government not to contribute to the public good in the
Given what we have learned about the rate at which deadweight loss increases as tax rates rise, what would you expect to happen to the optimal level of government provision of a particular public
Could it be that an increase of government support for a public good causes someone who previously chose to give to that public good to cease giving? How would such a person’s best response
True or False: If everyone is currently giving to a public good, including the government, then this model would predict that the government’s involvement has not done anything to alleviate the
If you and I have identical tastes but I have more income than you, would the equilibrium fall above, on, or below the 45-degree line (assuming all goods are normal goods)?
In a graph with y on the horizontal axis and a composite private good x on the vertical, illustrate my budget constraint assuming that y2 5 0. How does this budget constraint change when y2 . 0? Show
Is there any reason to think that y * , the optimal level of the public good, will be the same regardless of what indifference curve for consumer 2 we choose to start with? How does your answer
Why must the shaded areas in panels (b) and (c) of Graph 27.2 be equal to one another?
What would the relationship in the graph look like if the technology had the opposite returns to scale as what you just concluded?
Does this production technology exhibit increasing or decreasing returns to scale?
Set up firm 2’s optimization problem and verify the best response function p2 1p2 2
Derive the right-hand side of equation (26.9).
Before going to our concrete example, we argued that Bertrand competition will lead to prices above marginal cost when xi 1c, pj 2 . 0. In our example, we find that, in equilibrium, p . c 5 MC so
Suppose pj 5 0. Interpret the resulting best price response for firm i in light of what we derived as the optimal monopoly quantity and price when x 5 A 2 ap.
In my experience, car advertisements on television are different. Can you argue that they are more in the category of informational advertising than the Coke and Pepsi ads we just discussed?
Suppose that you hear that an industry group is attempting to persuade the government to ban advertising in its industry. Given your answer to exercise 26a.13, might you be suspicious of the industry
Consider an oligopoly with consumers being only partially aware of each firm’s products and prices, and suppose that firms in the oligopoly decide to engage in informational advertising. In what
Many of the advocates for lowering n in patent laws draw on the burst of innovation in open source software communities. Can you see why?
The innovation discussed above was in terms of product characteristics and thus impacted demand. Can you tell the same kind of story where a firm instead innovates in a way that reduces its costs?
True or False: With economic profit appropriately defined for each firm, the profit of firms in the industry is positive while the profit of a firm outside the industry would be zero or negative if
Where in panel (a) of Graph 26.4 is the firm’s total revenue given that it charges p i ? Where is its variable cost given that it produces x i ?
True or False: While we needed a model of product differentiation to allow for Bertrand competition to be able to fully fill the gap between perfect competition and monopoly, we do not need anything
True or False: as long as the fixed entry cost FC . 0, firms in the industry will make positive profits while firms outside the industry would make negative profits by entering the industry.
In the context of this model, why is the last sentence slightly more correct than the second to last sentence in the previous paragraph?
If there is no first stage entry decision and the number of firms is simply fixed as in an oligopoly with barriers to entry, can you see how this represents the full equilibrium of the game?
Consider the case described in exercise 26a.4 and assume the two firms are symmetric relative to one another. Will it still be the case that p . MC? Can you see how decreasing product differentiation
Suppose the demand for firm 2’s output is zero for any p2 at or above MC when firm 1 sets price p1 to zero. Furthermore, suppose that demand for firm 2’s output becomes positive at p2 5 MC when
Would the equilibrium outcome be different if one firm announced its product characteristic prior to the other one having to do so?
We have said that under product differentiation we would expect the quantity of Coke that is demanded to be affected by both the price of Coke and the price of Pepsi. Can you see how the models of
True or False: Suppose that Coke knows that it has positive consumer demand if it sets p 5 MC. Then it must be the case that Coke will price above MC.
25.12 Policy Application: Government Grants and Cities as Cartels: In exercise 19.6, we explored the idea of city wage taxes and noted that these were exceedingly rare and occurred primarily in very
25.11 Policy Application: Subsidizing an Oligopoly: It is common in many countries that governments subsidize the production of goods in certain large oligopolistic industries. Common examples
25.10 Policy Application: Mergers, Cartels, and Antitrust Enforcement: In exercises 25.8 and 25.9, we illustrated how firms in an oligopoly can collude through mergers or through the formation of
g. Assuming that cartel quotas are assigned using alternating offer bargaining, which cartels are most likely to hold: those that revert to Bertrand, Cournot, or Stackelberg? Can you explain this
f. * Repeat (e) for the case of Bertrand and Stackelberg competitors.
e. * Suppose the two firms enter a cartel agreement with a view toward an infinite number of interactions. Suppose further that $1 one period from now is worth $d , $1 now. What is the lowest level
d. In terms of payoffs for the firms is the outcome from the cartel agreement any different than the outcome resulting from the negotiated acquisition price in exercise 25.8?
c. Suppose A 5 1,000, c 5 20, and a 5 40. What is the cartel quota for each of the two firms under each of the economic and bargaining settings you have analyzed?
b. Verify that the fraction of the overall cartel production undertaken by each firm under the different scenarios is what you concluded in A(c).
B. Suppose again that firms face the demand function x1p2 5 A 2 ap, that they both face marginal costc, and neither faces a recurring fixed cost.a. For each of the bargaining and economic settings
h. If you are a lawyer with the antitrust division of the Justice Department and are charged with detecting collusion among firms that have entered a cartel agreement, and if you thought that these
g. Suppose the firms cannot get the government to enforce their cartel agreement. Explain how such cartel agreements might be sustained as a subgame perfect equilibrium if, each time the firms
f. In the early years of the Reagan administration, there was a strong push by the U.S. auto industry to have Congress impose protective tariffs on Japanese car imports. Instead, the administration
e. Explain why the firms might seek government regulation to force them to produce the prescribed quantities in the cartel agreement.
d. Assume that any cartel agreement results in x M being produced, with each firm producing a share depending on what was negotiated. True or False: For any such cartel agreement, the payoffs for
c. Assuming the cartel agreement sets x M—the monopoly output level—as the combined output quota across both firms, what fraction of x M will be produced by firm 1 and what fraction by firm 2
A. Suppose again that both firms face a linear, downward-sloping demand curve, the same constant marginal cost, and no recurring fixed costs.a. Under the different bargaining settings and economic
25.9 Business and Policy Application: Production Quotas under Cartel Agreements: In exercise 25.8, we investigated the acquisition price that an incumbent firm might pay to acquire a competitor under
g. Suppose A 5 1,000, c 5 20, and a 5 40. What is the acquisition price in each of the cases you previously analyzed? Can you make intuitive sense of these?
f. Repeat (b) if the two firms expect firm 1 to be the Stackelberg leader.
e. Repeat (a) if the two firms expect firm 1 to be a Stackelberg leader.
d. Repeat (b) if the two firms expect to be Cournot competitors. How does it compare with the answer you arrived at in (b)?
c. Repeat (a) for the case where the two firms expect to be Cournot competitors.
b. What is the acquisition price if the two firms engage in the alternating offer game?
a. Suppose the firms expect to be Bertrand competitors if they cannot agree on an acquisition price. If firm 1 is the proposer in the ultimatum bargaining game, what is the subgame perfect
B. Let firm 1 be the large incumbent firm and firm 2 the upstart firm. Assume they have no recurring fixed costs and both face the same constant marginal costc. The demand for the product is given by
h. Would your advice be any different for the incumbent?
g. If part of the negotiations involves laying the groundwork to set expectations about what kind of economic environment will prevail in the absence of a deal, what would you advise the upstart
f. Do you think acquisition prices for a given bargaining setting will be larger under Cournot competition than under Stackelberg competition? Does your answer depend on which bargaining setting we
e. Which of these acquisition prices is largest? Which is smallest?
b. Which of your answers in (a) might change if firm 2 is very impatient while firm 1 can afford to be patient?c. Let Y Brepresent the overall gain in profit when the alternative to a deal is
a. Let Y denote the overall gain in profit to the industry if an acquisition deal is cut. How is Y divided between the firms under three bargaining environments: An ultimatum game in which the
A. Suppose that the firms face a linear, downward-sloping demand curve, the same constant marginal cost, and no recurring fixed costs.
25.8 Business Application: Deal or No Deal—Acquisitions of Upstart Firms by Incumbents: Large software companies often produce a variety of different software, and sometimes a small upstart
25.7 Business Application: Financing a Strategic Investment under Price Competition: In exercise 25.6, we investigated the incentives of firms to finance technologies that lower marginal costs. We
e. Suppose cr 5 20. For what range of FC will firm 1 adopt and firm 2 not adopt the technology even if it is permitted to do so?
d. Now consider the competitor. Suppose he or she sees that firm 1 has invested in the technology(and thus lowered its marginal cost to cr). Firm 2 finds out that the patent on firm 1’s technology
c. Suppose that A 5 1,000, c 5 40, and a 5 10. What is the highest FC can be for you to decide to go ahead with the investment if the new marginal cost is cr , c and assuming the competitor cannot
b. If you lower your marginal cost to cr , c by taking on a recurring fixed cost FC, what will be your profit assuming that your competitor still produces? (If you have done exercise 25.4, you can
a. What will happen to your output level if you simply engage in the competition by producing first? What will happen to your profit?
B. * Suppose again that demand is given by x 5 A 2 ap, that there are currently no fixed costs, that all firms face a constant marginal costc, and that you are about to face a competitor (because
f. Suppose the potential competitor could also invest in this technology. Might there be circumstances under which your firm will invest and your competitor does not?
e. Do you think that investments like this—intended to deter production by a competitor—are efficiency enhancing?
d. If the technology reduces marginal costs by a lot, might it be that you can keep your competitor from producing? If so, what will happen to output price?
c. If MCr is relatively close to MC, will you be able to keep your competitor out? In this case, might it still be worth it to invest in the technology?
b. Suppose you can develop an improved production process that lowers your marginal cost to MCr , MC. Once developed, you will have a patent on this technology, implying that your competitor cannot
a. If this is the state of things when the patent runs out, will you change your output level? What happens to your profit?
25.6 Business Application: Financing a Strategic Investment under Quantity Competition: Suppose you own a firm that has invented a patented product that grants you monopoly power. Patents only last
g. If n , n, how will output price evolve as the industry declines?
f. Suppose firm S can only go into debt for n time periods. Let n be the smallest n for which the subgame perfect equilibrium without credit constraints holds, with n , n implying the change in

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