There are 3 questions and 40 points in total. Show all steps of your work. Only writing the final answer is not enough. Question 1
There are 3 questions and 40 points in total. Show all steps of your work. Only writing the final answer is not enough. Question 1 [10 points] Consider a monopolist M who faces a linear demand curve and has constant unit cost of production. The demand curve, the marginal revenue (MR) curve and the unit cost line of M are drawn in the following diagram. Diagram 1 price, cost demand curve unit cost line quantity MR You are only required to locate the relevant quantities and identify the regions that are asked in the following questions. You do not have to find the values of the quantities or the regions. You can draw additional diagrams for your answers. (a) [6 points] In the diagram, locate the quantity that maximizes the profit of M. Identify the regions corresponding to: (i) the profit of M. (ii) consumer surplus under monopoly and (iii) the total surplus under monopoly. (b) [4 points] In the diagram, locate the quantity that maximizes the surplus in the absence of the monopolist. Identify the regions corresponding to: (i) maximum surplus and (ii) the loss in surplus under monopoly (deadweight loss).Question 2 [15 points] A risk averse individual faces uncertainty with two outcomes: good, bad. The individual has income $1260 at good and $720 at bad outcome. The probability of good outcome is 7/9 (so the probability of bad outcome is 1 - 7/9 =2/9). The individual can buy any non-negative x units of insurance. Every unit of insurance has price Sp and it pays $1 in the event of bad outcome. In this insurance market, the unit price of insurance is known to be p = 1/3. (a) [9 points] Suppose the individual buys x units of insurance. Determine the individual's net income under good income, net income under bad income and the average net income. Draw these three in a diagram as functions of x. (b) [6 points] For the individual: (i) compare full insurance with over insurance and (ii) compare full insurance with partial insurance. Then determine best choice of insurance for the individual.Question 3 [15 points] Consider a Bertrand duopoly with two firms I and 2. They sell the same good that has demand curve given by Q=8 -pifp
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