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1. Two firms are developing new technology to allow consumers to taste food online. Given the risks and the relatively small anticipated size of this market, compatibility of technologies is very important. "La Brasa Roja" is firmly advancing in developing its technology, RemoteTaste. "Kokoriko" has been developing its technology, BitterWeb. If both adopt the same technology, each can earn a total of $200 million. If they adopt different technologies, consumers will not buy any products, leading to a profit of $0. Reconditioning the factory to implement a technology different from its own would cost "Kokoriko" $100 million and "La Brasa Roja" $200 million. The decision about which technology to adopt must be made simultaneously. (a) 0.2 points Represent the game in normal form. (b) 0.2 points Represent the game in the extensive form. (c) 0.3 points Find the Nash equilibria in pure strategies. (d) 0.3 points Find the Nash equilibria in mixed strategies.

2. Subway has a monopoly on sandwiches and makes an annual profit of $100,000. Metro, a newly formed Canadian company, is contemplating entering the market, incurring costs of $25,000 and splitting annual profits 50-50 with Subway. Subway threatens to sell at cost, if necessary, to maintain its monopoly position. In which case neither firm would make a profit. Remember that: Metro still incurred some fixed costs of entering a new market. Metro can choose between "enter the market" and "don't enter the market" and Subway, once it sees if Metro enters, can decide between "Sell at cost" and "Welcome the new competitor".

(a) 0.2 points Draw the game extensively, including payoffs (b) 0.2 points Write the normal representation of the game. (c) 0.2 points Shows that Subway's threat is not credible. (d) 0.2 points What is the subgame perfect equilibrium? (e) 0.2 points Is there a Nash equilibrium that is not a subgame perfect equilibrium? justify and if it exists, say why this balance does not make sense.

Suppose there are 25 potential used-car buyers, each of whom is willing to pay $1200 for a good used car and $400 for a lemon. Potential buyers want to buy at most one car. Before they purchase a used car, buyers are not able to tell whether it is a good used car or a lemon. The current owners of good used cars have a reservation price of $700 for their cars, and the current owners of lemons have a reservation price of $200. In this market, there are 5 good used cars and 15 lemons.

a. Draw the resulting supply curve.

Suppose that all of the potential buyers believe that all used cars will be offered for sale.

b. What is the average quality of cars sold? c. Draw the demand curve. d. What is the market equilibrium (price, quantity and quality)?

Suppose now that all consumers believe that the only lemons will reach the market:

e. Does the market equilibrium change? If so, how?

1. Assume that peaches are grown in a perfectly competitive market and that peach farms

have cost curves that look like those in this chapter. Draw a graph for a peach farm that

earns a profit. Label the axes, as well as the curves for demand, marginal revenue, average

total cost, and marginal cost. Label the prices of peaches "P" and the quantity of peaches

the farm will produce "Q". Shade and label the farm's profit.

2. Suppose the firms in a perfectly competitive market earn profits in the short run. Explain

how this market will reach a long-run equilibrium. Illustrate your answer with side-by-side

graphs of the market and a representative firm.

3. True, false or uncertain: After some firms leave a market in which they were experiencing loses, the remaining firms will produce the same quantity of output as before the other firms left. Explain your answer using side-by-side graphs of the market and a representative firm.

4. True, False or uncertain: A firm maximizes its profit by producing the quantity at which the marginal cost is as far below the price as possible. Explain your answer.

5. What characteristic does hamburger market in your area share with a perfectly competitive industry? What conditions for the perfect competition does it violate?

Firm A produces widgets. The market for widgets is perfectly competitive and there are a large number of small scale firms including Firm A. All the firms operating in the market use the same production technology, which is represented by the production function = , where x is the output (in units of widgets). The production of widgets requires a workshop, material, and electricity, apart from labour. Each firm, including Firm A, owns one workshop. Production of one unit of widgets require material of value USD 20 and 4 units of electricity. Wage rate is USD 100 / day, opportunity cost of a workshop is USD 220 / day, and electricity charges are USD 1.25 per unit. The daily market demand function for widgets is: = 2445 - 5, where X is the number of units of widgets demanded in the market per day, and P is the price of widgets per unit. Firm A and all other firms in the market are profit maximisers. 1.A. The market for widgets is in short-run equilibrium, and Firm A is making a loss of 90 USD per unit of widget. How many firms are there in the industry? [5] 1.B. How many firms must leave the industry to bring the market to a long-run equilibrium?

There are two groups: "omnivores (from now consider them as group A) ", and "vegans"(group B) . There are 100 individuals: 50 are omnivores and 50 are vegans. Omnivores eat meat (good 1) and vegetables (good 2) with utility log x A 2 +log x A 1 2 whereas vegans only eat vegetables (good 2) with utility log x B 2

. All individuals can produce 4 units of meat and 4 units of vegetables which they sell in a competitive market. (a) Set the price of meat to one. Find the vegetable demand function for each of the omnivores. [4 marks] (b) How does invoking Walras law facilitate solving for the price of vegetables? [3 marks] (c) What is the equilibrium price of vegetables? [4 marks] (d) What are the utility levels of omnivores and vegans at the equilibrium price of vegetables? [Hint: you can leave your answer in logs] [8 marks] (e) Does it make sense to compare utility of omnivores and vegans? [3 marks] (f) Now suppose that 25 of the omnivores become vegans, i.e. so that there are 75 vegans and 25 omnivores. What is the new equilibrium price of vegetables? [6 marks] (g) How does the utility of omnivores and vegans change due to the increase in the number of vegans? Explain the economics behind your finding. [8 marks] (h) Explain why your finding in part 7 depends on a general equilibrium analysis, i.e. considering a change in the equilibrium relative price of vegetables. Would you get a different result if the supply of vegetables also increased as more people become vegan? [6 marks] (i) Assume that some vegans consider the market for meat to be repugnant. Discuss the parallels and differences in the arguments that could be made for banning eating meat and markets for organs for transplant, referring to the course readings in your answer. What economic considerations should go into deciding whether to allow meat consumption? (Hint: should distributional considerations be a deciding factor?

Suppose that electricity is generated by burning coal, and that the mining, processing, and burning of coal have considerable environmental and health costs associated that are not reflected in the market price. Suppose that the market demand for electricity can be represented by the equation QD = 14 - 0.2P (or P = 70 - 5QD), where the quantity demanded represents marginal benefit, and that the market supply can be represented by QS = 4 + 0.8P (or P = -5 + 1.25QS) where the quantity supplied represents private marginal cost. The price is in cents per kilowatt hour and the quantity is in terms of millions of kilowatt hours per month.

a. Show the demand (marginal benefit) and supply (private marginal cost) curves on a diagram. Make sure to label your axes, curves, and intercepts.

b. Use algebra to solve for the private equilibrium price and quantity, and show the equilibrium price and quantity on your diagram.

c. Suppose that the external cost associated with producing one kilowatt hour (kwh) of electricity is $0.25. What is the equation for the social marginal cost curve? Add the social marginal cost curve to your diagram.

d. Use algebra to solve for the socially optimal price and quantity consumed of electricity. Explain.

e. What excise tax would have to be set in order to get electricity-producing firms to produce the socially optimal level of output? What would be the burden of this tax on consumers and producers?