Name: ____________________________ Econ 221 Fall 2023

Econ 221 Problem Set 5

Complete the following problems in the space provided. Remember to label axes on graphs and list units for all answers as appropriate. PS5 is due on Tuesday 10/31.

1) Monopoly: Graph (6 points)

The marginal costs (MC), average variable costs (AVC), and average total costs (ATC) for a monopolist are shown in the figure below. The figure also shows the demand curve (D) and the marginal revenue curve (MR) for this market.

What is thefirm'sprofit-maximizing level of output? Label this on the graph.

What price will the monopolist charge for that level of output? Label it on the graph.

What is the monopolist's profit-per unit?

What is the monopolist's total profit?Calculate the dollar value and label this area on the graph.

If this market were perfectly competitive, it would produce where the supply curve (represented by MC) intersects demand. What is that output level? How does the efficientquantity compare with the monopolist's quantity you found in (a)?

With that in mind, identify and label the area on the graph which represents the deadweight loss (DWL) in this market.

Econ 221 Fall 2023

d. Briefly describe what will happen to this monopoly firm and industry in the long-run. Specify whether there willbe entry/exit and what happens to this firm's profit.

2) Monopolistic Competition: Table (6 points)

The table below shows data for a monopolistically competitive firm.

Price

Quantity

Total Cost

TR ($)

MR($)

MC ($)

$60 0 $35 $50 1 $50 $40 2 $60 $30 3 $75 $20 4 $95 $10 5 $120

$0 -- --

Complete the table above by calculating Total Revenue, Marginal Revenue, and Marginal Cost at each output level.

In order to maximize profit, how many units should the firm produce? What price should they charge?

At the profit-maximizing output level, what is the firm's total profit?

Given your answers above, what will happen to the industry in the long-run, and what will happen to this firm? Specify what will happen to the number of firms in the market andwhat that will do to each firm's demand curve as well as their profits.

3) Monopolistic Competition: Graph (4 points)

The graph to the right shows cost curves, demand, and marginal revenue for a cell phone producer in a monopolistically competitive market.

What is the firm's profit maximizingoutput level?

What price will the firm charge?

What is the firm's profit (or loss) per- unit?

What is the firm's total profit (or loss)?Label this area on the graph and calculate.

What will happen to this industry in the long-run, and this firm's profits?As we did in the previous problem, specifically outline each step of the process-what will happen to the number of firms in the market.each firm's demand curve,and those firms' profits.

Econ 221 Fall 2023

4) Game Theory (4 points)

Suppose Google and Apple are deciding on an advertising budget to promote their new Pixel and iPhone releases, respectively. They are each deciding between a high and low advertising budget, with the goal of maximizing profits. Their profits, in billions, are shown in the decision matrix below.

Econ 221 Fall 2023

Apple (iPhone)

High budget

Low budget

Google (Pixel)	High budget	$4 B $6 B	$3 B $7 B
Low budget	$8 B $5 B	$7 B $10 B

a. Who are the players in this game? What are their possible strategies?

Solve the matrix by evaluating each firm's preferred strategies and circling them.You'll endup with 4 individual payoffs circled.

Does Apple have a dominant strategy? If so, what is it? Does Google have a dominant strategy? If so, what is it?

Is there a Nash Equilibrium? If so, what is it?[Specify the combination of strategies that the players choose to get to that outcome.]

BONUS:What do you predict will be the outcome of this game, and why? Is there incentive for Apple and Google to collude? Why or why not?

5) Game Theory II (6 points)

Suppose Alaska Air and Delta are the only two airlines that fly a certain route, and can choose to charge either a higher price or lower price for that route. If both choose the higher price, they each earn a profit of $175 million. If both choose low pricing, both earn a profit of $125 million. If they choose opposite pricing strategies, the firm charging the lower price will sell more tickets and profit $200 million, while the firm that chose the higher price will earn $100 million.

Who are the players in this game? What are their possible strategies?

Fill in the strategies and payoffs on the decision matrix below. Be sure to list Alaska's payoffs first, in the lower left corner, followed by Delta's in the upper right.

Delta

Econ 221 Fall 2023

Alaska Air

c. Once you've filled in the payoffs, solve the matrix by evaluating each firm's preferred strategies and circling them.You'll end up with 4 individual payoffs circled.

d. Does Alaska Air have a dominant strategy? If so, what is it? Does Delta have a dominant strategy? If so, what is it?

Is there a Nash Equilibrium? If so, what is it?[Again, specify the combination of strategies that the players choose to get to that outcome.]

There is incentive for the airlines to collude in this scenario. Which option will they choose, and why?(Think about how this game might be similar to the Prisoner's Dilemma.)

6) Labor Demand (3 points)

Suppose the table below shows the productivity for workers at a small farm in the Central Valley, which operates in a perfectly competitive market. The farm produces cherries, which sell for $6 per pound. The firm can hire as many workers as it wants, at a wage of $120 per worker per day.

Based on the values given, calculate the marginal product and value of the marginal product (marginal revenue product) of each worker. Enter your answers directly into the table.

Number of Pounds of Marginal Product Value of Marginal Workers Cherries (lbs of cherries) Product ($)

0 0 -- -- 1 25 2 45 3 60

4 70

Ifthe farm'sgoal is to maximize profit, how many workers should it hire per hour? Explain briefly.