Question 1

This is exercise is an introduction to a model for duopoly known as Bertrand competition, which focuses on firms in duopoly markets that compete in terms of prices rather than quantities.

Lightning bus (LB) and Super bus (SB) travel between Baltimore and Charlotte. Each of them incurs a fixed cost of $500: the rental price of the bus, the gas, tolls, etc. Both of them have the same type of bus, which seats 120 passengers. Suppose the marginal cost of an additional passenger is zero (if there are currently less than 120 passengers).

1. LB and SB are both considering between charging a $20 ticket or a $19 ticket. Assume there are exactly 120 possible passengers. Assume also that if both companies decide to charge the same price, each one of them gets half of the demand (60 passengers) and so has a profit ofBLANK(number, no symbols) when they charge $20 andBLANK(number, no symbols) when they charge $19. If they charge different prices, consumers will always choose to buy from the cheaper bus, and the one that charges more has a profit ofBLANK(number, no symbols), whereas the one that charges less has a profit ofBLANK(number, no symbols).
2. Do any of the firms have a dominant strategy?BLANK(choices are: (No) or (Yes, dominant price) )
3. Using the concept of Nash equilibrium the price charged by each company will beBLANK. (prices of each should be listed as (price,price) .ie (100,100) )
4. The managers of LB and SB are now considering between the prices you predicted in part 3 and a lower price of $18. The payoff matrix will look analogous to the previous one. Using the same reasoning as before, the prices chosen will beBLANK(format as previous part .ie (100,100) ).
5. Following this line of reasoning, the prices they will eventually choose areBLANK(format as previous part).

Question 2

A chemical plant makes a chemical H.The market for H is perfectly competitive.The firm's marginal cost function is MC=10Q.The demand facing the firm is flat p=$100 per ton.Every ton of H produced causes pollution damage to the environment equivalent to $50.

1. The private marginal cost of producing H isBLANK(formula).

2. Without government intervention, the quantity produced will beBLANK(number), the price will beBLANK(number, no symbols), and the total cost of the damage to the environment will beBLANK(number, no symbol).

3. The social marginal cost of producing H isBLANK(formula).

4. The socially optimal quantity of production isBLANK(number) and the total cost of the damage to the environment at this quantity isBLANK(number, no symbol).

5. A tax ofBLANKper ton would be able to bring about the socially optimal level of production.(number, no symbol)

Question 3

A city with a population of 100 is deciding to build a new subway line. The project costs $30 million. 99 people each value the additional subway line at $200,000 and one person at $20 million (since he owns a business in a remote area that would be serviced by the new line ).

1. The city as a whole derives a social benefit ofBLANKfrom this new project. (number, no symbols).

2. BridgeBLANKbe built (choices are : should or should not)

3. The unregulated outcome is that the bridge isBLANK(choices: built or not built) which isBLANK(choices: efficient or inefficient).

4.(True or False): The government could use a flat per-person tax to finance the building of the bridge:.