Q2 To illustrate the competitive process in markets dominated by few firms, assume that a two-firm duopoly dominates the market for softdrinks, and that the firms face a linear market demand curve

P= $53 - Q

where P is price and Q is total output in the market (in thousands). Thus Q = Q_A+ Q_B. For simplicity, also assume that both firms produce an identical product, have no fixed costs and marginal cost

MC_A= MC_B= $5.

A.Derive the output reaction curves for Firms A and B. Illustrate with the help of a diagram.

B.For each firm, calculate the Cournot market equilibrium price-output solution and profits.

Q3 Identify each of the following as being consistent with risk-averse, risk-neutral, or risk-seeking behaviour in investment project selection. Explain your answers.

A.Larger risk premiums for riskier projects

B.Preference for smaller, as opposed to larger, coefficients of variation

C.Valuing certain sums and expected risky sums of equal dollar amounts equally

D.Having an increasing marginal utility of money

E.Ignoring the risk levels of investment alternatives

Q4 Indicate whether each of the following involves an upward or downward shift in the long-run average cost curve or, instead, involves a leftward or rightward movement along a given curve. Also, indicate whether each will have an increasing, decreasing, or uncertain effect on the level of average cost.

A.A rise in wage rates.

B.A decline in output.

C.An energy-saving technical change.

D.A fall in interest rates.

E.An increase in learning or experience

Q5 JB-Hi-Fi and other movie DVD retailers, including online vendors like Ebay employ a two-step pricing policy. During the first six months following a theatrical release, movie DVD buyers are willing to pay a premium for new releases. The total revenue relations for a typical newly released movie DVD are given by the following relations:

TR = $ 28 Q - $0.0045Q2

Total cost (TC) for production and distribution are:

TC = $ 4,500 + $ 3 Q + $ 0.0005Q2

where Q is in thousands of units (DVDs). Because units are in thousands, both total revenues and total costs are in thousands of dollars. Total costs include a normal profit.

A.Use the marginal revenue and marginal cost relations to calculate DVD output, price, and economic profits at the profit-maximizing activity level for new releases.

B.After six months, price-sensitive DVD buyers appear willing to pay up to $6 per DVD, but no more. Calculate the equilibrium price-output activity level in this situation. Is this a stable equilibrium?

Q6 During recent years, Micro Chips Corp. has enjoyed substantial economic profits derived from patents covering a wide range of inventions and innovations for microprocessors used in high-performance desktop computers. A recent introduction, the Penultimate, has proven especially profitable. Market demand and marginal revenue relations for the product are as follows:

P = $5500 - $0.005Q

MR =TR/Q = $5500 - $0.01Q

Fixed costs are nil because research and development expenses have been fully amortized during previous periods. Average variable costs are constant at $4500 per unit.

A.Calculate the profit-maximizing price/output combination and economic profits if Micro Chips enjoys an effective monopoly because of patent protection.

B.Calculate the price/output combination and total economic profits that would result if competitors with the same costs offer clones that make the market perfectly competitive.