Liberty University Econ213 Problem Set 4 complete solutions correct answers key
Problem Set 4 is due by 11:59 p.m. (ET) onFridayof Module/Week 8.
1.Monopolies can sometimes find themselves in difficult financial situations that lead to losses. Suppose Mr. Burns power company has a monopoly for providing electricity in Springfield. His costs of upkeep are so high that he is consistently losing money.
a.)Show this outcome in a completely labeled graph. Clearly identify all parts of your graph including the best price and output for the firm as well as the losses.
Now answer the following:
b.)What happens to the market output when Mr. Burns raises the price he charges?
c.)Will this stop his losses? Why or why not?
2.Assume the following game is played one time only. Based on the information in the payoff matrix below PNC Bank and Citizens Bank are considering an implicit collusive agreement on interest rates. Payoffs to the two firms are represented in terms of profits in thousands of dollars.
Citizens BankCollude: Raise RatesDefect: Keep Rates Where They ArePNCCollude: Raise Rates
(900 600)(700 800)Defect: Keep Rates Where They Are(1100 300)(800 400)
a.)Does PNC have a dominant strategy? What is it?
b.)Does Citizens have a dominant strategy? What is it?
c.)Does the result of your answer change if the game is played an infinite number of times? Why or why not? Properly use game theoretic terminology in your answer.
3.What is the profit-maximizing output of the monopolist shown below? ___________
What price do they set? _______________________
What is the monopolists markup over the competitive price? ________________
Why will this price not fall?
4.Levis has an advertising slogan: Quality never goes out of style. Consumers can buy other kinds of jeans including off-brands. The manufacturers of off-brand or generic jeans do not advertise. Assume that the average total cost of producing Levis and generic jeans is the same.
a.)Create a graph showing the price (labeled as P1) that Levis changes. Also identify the markup.
b.)How does Levis advertising affect their profits?
c.)Do Levis or the generic producers have a stronger incentive to maintain quality control? Why?