Question 3 (30 points) i. Consider the following pay-off matrix for two pharmaceutical firms competing in an oligopoly setting and contemplating low or high price strategies: Player 2 Price Low High Player 1 Low 10; 10 60,-5 High -5, 60 50,50 Note: Payoffs are in millions of dollars. First payoff in each cell is for Player 1. What is the best strategy for each firm to adopt? What strategy will each firm adopt in a Nash equilibrium and why? ii. Suppose in a restaurant the price of a slab of ribs is $10 and for fried chicken it is $5. If a consumer's weekly income is $90 and marginal utilities are MUR = 20RC for ribs and MUC = 10R2 for chicken (R and C being quantities of ribs and chickens), what is her optimal bundle? iii. A multiproduct firm's cost function was recently estimated as: C (Q1, Q2) = 75 -0.25Q1Q2 + 0.1Q,2 +0.2Q2? Are their economies of scope in producing 10 units of product 1 and 10 units of product 2? Explain with calculations. iv. Public health officials hold that someone who wears a face mask helps prevent spread of Covid- 19. Several social groups hold mandating mask wearing is an infringement of individual liberties and freedom. What economic concept would you use to promote making mask wearing mandatory? Explain. V. Suppose you are an author who earns a 15% royalty from the publisher for each copy of your books sold. Would you like your publisher to maximize their profit by restricting book sales and keeping prices higher? Why or why not? Explain. vi. Suppose a production function is of the form: Q = KPL. What returns to scale apply to this production function? How will the average cost of production curve pertaining to this function look like? What about the marginal cost curve? Draw these average and marginal cost curves. Question 3 (30 points) i. Consider the following pay-off matrix for two pharmaceutical firms competing in an oligopoly setting and contemplating low or high price strategies: Player 2 Price Low High Player 1 Low 10; 10 60,-5 High -5, 60 50,50 Note: Payoffs are in millions of dollars. First payoff in each cell is for Player 1. What is the best strategy for each firm to adopt? What strategy will each firm adopt in a Nash equilibrium and why? ii. Suppose in a restaurant the price of a slab of ribs is $10 and for fried chicken it is $5. If a consumer's weekly income is $90 and marginal utilities are MUR = 20RC for ribs and MUC = 10R2 for chicken (R and C being quantities of ribs and chickens), what is her optimal bundle? iii. A multiproduct firm's cost function was recently estimated as: C (Q1, Q2) = 75 -0.25Q1Q2 + 0.1Q,2 +0.2Q2? Are their economies of scope in producing 10 units of product 1 and 10 units of product 2? Explain with calculations. iv. Public health officials hold that someone who wears a face mask helps prevent spread of Covid- 19. Several social groups hold mandating mask wearing is an infringement of individual liberties and freedom. What economic concept would you use to promote making mask wearing mandatory? Explain. V. Suppose you are an author who earns a 15% royalty from the publisher for each copy of your books sold. Would you like your publisher to maximize their profit by restricting book sales and keeping prices higher? Why or why not? Explain. vi. Suppose a production function is of the form: Q = KPL. What returns to scale apply to this production function? How will the average cost of production curve pertaining to this function look like? What about the marginal cost curve? Draw these average and marginal cost curves
