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If two firms have the same constant marginal cost, they earn zero profits in the Bertrand equilibrium. This depends crucially on the feature that the goods involved are perfect substitutes. If products are differentiated instead, then the Bertrand equilibrium can lead to positive profits. The products are differentiated when consumers consider them only imperfect substitutes Whilst a consumer may be unwilling to buy the product of one producer, she will have the incentive to do this if the price of their favorite product becomes too high. To model this we allow the demand for each good to depend not only on its own price but also on the price of the other good. Assume for example that the demand for the good produced by F irm1, q1, and the demand for the good produced by F irm2, q2, are described by the following functions: q1 = 180 p1 (p1 p) q2 = 180 p2 (p2 p) 6 where p is the average price that is taken over the prices of the two firms. Each firm has average (and marginal) cost c = 20. Suppose the firms can only choose between the three prices {94, 84, 74}. 1. Compute the profits of the firms under the 9 different price combinations that are possible in the model. 2. Using you answer to the previous point, construct the 3x3 payoff matrix for the normal form game where the payoffs are given by the profits of the firms 3. Find the (Bertrand-)Nash equilibrium of this game. What are the profits at this equilibrium?

Problem 2: Location Choice. Dallas currently has an NBA team (the Mavericks). Demand for Mavericks games in Dallas is given by:

PD(QD) = 160 2QD Austin does not currently have an NBA team, but they would like to attract the Mavericks.

Demand for Mavericks games in Austin is given by: PA(QA) = 180 2QA

The marginal cost of production in both cities is constant at MC = 40.

2. Suppose now that cities can offer subsidies (i.e., bids) to attract the team.

a) What is the highest subsidy that Dallas would offer the team to stay?

b) What is the highest subsidy that Austin would offer the team to move?

c) Will the team move to Austin?

d) How much is the winning subsidy? e) What is the profit plus subsidy for the team?

f) What is consumer surplus minus the subsidy?

Problem 2: Location Choice. Dallas currently has an NBA team (the Mavericks). Demand for Mavericks games in Dallas is given by:

PD(QD) = 160 2QD Austin does not currently have an NBA team, but they would like to attract the Mavericks.

Demand for Mavericks games in Austin is given by: PA(QA) = 180 2QA

The marginal cost of production in both cities is constant at MC = 40.

3. Suppose that the consumer surplus in Dallas is actually 2000, but all other values remain the same.

a) If subsidies are banned, where would the team locate? b) If subsidies are allowed, would the team move to Austin?

c) If subsidies are allowed, how much is the winning subsidy? d) If subsidies are allowed, what is the profit plus subsidy for the team?

e) If subsidies are allowed, what is consumer surplus minus the subsidy?

[1:41 AM, 10/28/2021] Fridah: Consider a country that produces and consumes Good X and Good Y.

True or False: A tax on the production of Good X always has the same impact as an equivalent tax on consumers of Good X because the tax creates a wedge between the price that consumers pay and the price that producers receive. All points will be awarded based on your explanation. Feel free to use a diagram to show your answer.

[Note: A statement can be false because a part of the statement is false or because the logic connecting parts of the statement is incorrect.] [1:51 AM, 10/28/2021] Fridah: 1.Suppose you have two part-time jobs, Restaurant Server and Uber Driver. After younger servers start working for less, employers pay only $11 instead of $14 per hour. What happens to your supply of hours for Uber driving? Explain.

2.The current bank interest is 10%. You borrow $20,000 from the bank as well as invest $20,000 of your own money in a new business for a year. Detail the obvious costs and the implicit costs (hidden opportunity costs) for both amounts of money you are investing.

3.Would you rather have higher inflation or higher unemployment? What are the reasons behind your personal choices?

4.Banks, like other businesses, operate to make profits. Are there reasons why banks should be subject to more government regulations than, for example a shoe store or dollar store? Explain your answer.

5.Recently, the Bank of Canada lowered its target for the overnight rate by 50 bases points to 0.25 percent in order to provide support to Canada's financial system. Explain how this change affects your decision to buy or not your own house.