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A duopoly faces inverse market demand of P (Q) = 120 Q, where Q is industry output, The two firms have a constant marginal cost of c = 30 and compete 'a la Cournot. a) Derive the best-response functions for both firms. b) Draw the best-response functions in a graph and determine the locus of the Cournot equilibrium. c) Compute the equilibrium quantities, price, and firm profits. Compare to the monopoly outcome. d) Suppose now that firm 1 implements a cost reduction program that allows it to produce at the constant marginal cost of cl = 15, while firm 2's constant marginal cost continues to be c2 = 30. Compute the new equilibrium quantities, price, and firm profits. Add firm 1's new best-response function to the graph of 1.2, and identify the locus of the new equilibrium. e) Compare market shares and firm profits before and after the cost cut. Are consumers better or worse off after firm 1 cut its costs?3. (2) Consider the supply and demand model below Demand: g=-p+3+4x+e, Supply: p=q+1+6, a) Find the reduced form equations for p and q. b) Suppose that x - 2. Find the equilibrium p and q (i.e., the values if e, = e, = 0 ). c) Suppose that x - 5. Find the equilibrium p and q (i.e., the values if e, = e, = 0 ). d) If we have / observations on p, q, and x, can we consistently estimate the reduced form equations by OLS? Why? e) To illustrate part (d), note that the slope of the reduced form curve for p is equal to Ap/Ar . Using the values from (b) and (c) compute Ap/Ax . Is the value equal to the reduced form coefficient for p? f) Do the same thing for Aq/Ar . Is the value equal to the reduced form coefficient for q? g) If we have A observations on p, q, and x, can we consistently estimate the supply equation by OLS? Why? h) To illustrate part (g), note that the slope of the supply curve is Aq/Ap. Using the values from (b) and (c) compute Ag/Ap. Is the value equal to the slope coefficient for the supply equation? i) . If we have / observations on p, q, and x, can we consistently estimate the demand equation by OLS? Why or why not?Question 2 (6 Marks) Robert has been saving money for a long time and finally he decides to place his saving into the bank account. Suppose from his saving Robert has deposited $12000 in Bank of the South Pacific which has the required reserve ratio of 10%. Using the information given above, calculate the following: a) Money multiplier. (2 Marks) b) Required reserves. (2 Marks) c) Excess reserves, assuming the actual reserve for the bank is $2800. (2 Marks) Question 3 (6 Marks) "Assume that the Fijian government removes all restrictions in relation to immigration which attracts a lot of people from different countries to settle in Fiji" Using the labor demand and supply curve explain what will happen to wage rate, employment and potential GDP in Fiji Question 4 (6 Marks) "The foreign exchange rate is highly affected by any change in the demand for the exported goods and services." Using foreign exchange demand and supply curve, explain the effect of decrease in world demand for domestic export on the foreign exchange market. Question 5 (6 Marks) "Open market operation refers to a central bank's buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system." Using AD/AS model, explain and show the process of an open market sales of government securities by the central bank on price level and output in the economy. Question 6 (6 Marks) "Monetary policy is a macroeconomic policy laid by the central bank which involves the management of money supply and interest rate to achieve the macroeconomic objectives." Using money supply and demand curve, show the effect of a contractionary monetary policy on the quantity of money and the price level. ECN5015em Semester 2, 2019 Page 7 of 8
