Explain how the market power of the monopolist can be reduced if they sell a durable goodPerfect competition, welfare and entryPerfect competition, welfare and entryQuestionFall 2015The mid-term exam will be held on Saturday, October 31, 3:30-5:00 pm. The exam will consistof questions taken from the list of potential questions below. The questions will be exactly thesame as those on the list below except that some of the numbers may change. Allowable examaids are a calculator. Exam is 1.5 hours long and consists of 3 questions (no choice).Potential Mid-term Exam Questions (each question is worth 20 marks)1.Perfect competition, welfare and entry. A perfectly competitive market consists of 3 firms.Total cost functions for each firm are given by C = 2q + 0.25×(q)2 + 256. Market demand isgiven by QD = 388 – 2P.a) (10 marks). Derive the supply curve for each firm (be sure to indicate at what price thefirms shuts down). Solve for the short-run equilibrium (i) price (ii) industry output (iii)output per firm (iv) profit per firm (v) welfareb) (10 marks). Solve for the long-run equilibrium (i) output per firm (ii) price (iii) industryoutput (iv) number of firms and (v) welfare. Show that entry causes welfare to increase.2.Monopoly, welfare and quality choice. A monopolist can produce a high quality productand face demand of Q = 60 – ½ P, Marginal cost = 12 and Fixed cost = 800 or a low qualityproduct and face demand of Q = 60 – P, Marginal cost = 4 and Fixed cost equal 100.a) (10 marks). Will the monopolist choose high quality or low quality?b) (10 marks). If monopoly pricing is assumed then is the monopolist’s choice of qualityefficient?3.Durable goods monopoly.a) (8 marks). Explain how the market power of the monopolist can be reduced if they sell adurable good. How can this problem of reduced market power be overcome if themonopolists leases rather than sells the product.Consider the following version of the textbook example done in class. A seller has 2 unitsof a durable good. The good provides the buyer with 2 periods of use if it is bought inperiod 1 and only 1 period of use if bought in period 2 (i.e. good is obsolete after period2). There are 2 buyers. Buyer 1 values the good at $100 per period in periods 1 and 2.Buyer 2 values the good at $75 per period in periods 1 and 2. Both buyers get zero valuefrom the good after period 2. Production costs are zero and there is no discounting.b) (6 marks) Determine whether the monopolist (i) sells to both buyers in period 1 or (ii)sells to Buyer 1 in Period 1 and to Buyer 2 in Period 2 or (iii) leases to both buyers in bothperiods or (iv) leases to Buyer 1 in both periods.c) (6 marks). Indicate which option in part b) yields the highest welfare.EC304Potential mid-term questionspage 1 of 4Fall 20154.Economies of scale and scope, Market Structure and Market Powera) (8 marks). Explain the sources of economies of scale and scopeb) (6 marks). Explain the determinants of market structure.c) (6 marks). What is market power and how is it measured? How is market concentrationmeasured? What is the relationship between market power and market concentrationaccording to the Cournot model? How can the relationship between market power andmarket structure be explained?5.Price Discriminationa) (10 marks). What is price discrimination? Under what circumstances is it feasible? Whyis it profitable? If a monopolist can practice third degree price discrimination then what isthe profit maximizing pricing rule involving elasticities? Give some examples as to howthis rule is applied in practice. Under what circumstances does price discriminationincrease welfare? Use diagrams to explain your answer.Suppose that demand is given by qa = 32 – pa in Market A and by qb = 40 – pb in Market Bwhere pi, and qi are price and output in market i = a, b, respectively. Marginal cost isconstant and equal to 4. Fixed costs are zero.b) (5 marks). Find the profit maximizing prices, quantities and profit if the monopolist canprice discriminate.c) (5 marks). Find the profit-maximizing price, quantity and profit if the monopolistcannot price discriminate. Determine whether it is more profitable to serve both marketsor to serve only Market B.6.Two-part tariffs and Block Pricinga) (5 marks). What are two-part tariffs? Give examples. Why are two-part tariffs moreprofitable than linear pricing when buyers buy multiple units? What is the profitmaximizing two-part tariff when all buyers are identical?b) (5 marks) What is block pricing? Give examples. Why is block pricing more profitablethan linear pricing when buyers buy multiple units? What is the profit maximizing blockpricing quantity and block price when all buyers are identical?c) (5 marks) Use a diagram to explain the profit maximizing menu of two part tariffs whenthere are low demand and high demand buyers. Explain how the monopolist will adjustthe menu when the number of high demand buyers increasesd) (5 marks). Use a diagram to explain the profit maximizing menu of block pricingquantities and prices when there are low demand and high demand buyers. Explain howthe monopolist will adjust the menu when the number of high demand buyers increases.EC304Potential mid-term questionspage 2 of 4Fall 20157.Versioninga) (4 marks). What is versioning? Give examples. Under what circumstances is versioningprofitable? What are damaged goods?Suppose that the willingness to pay for different version of a piece of software is givenbelow for Students, Professors and Consultants. Costs are zero and there are equalnmbers of Students, Professors and Experts.Version Student Professors ConsultantsBasic$50$x$100Full$100$150$400b) (8 marks). Let x = 70.(i) If the seller offers one version then determine the version offerred, the price of thatversion, the number of buyers served, profits and welfare.(ii) If the seller offers both versions then determine the prices of both versions, thenumber of buyers served, profits and welfare.c) (8 marks). Let x = 80. Repeat part b).8.Bundling and Mixed Bundlinga) (4 marks). What is bundling? Give examples. Under what circumstances is bundlingmore profitable than selling goods individually?b) (4 marks). What is mixed bundling? Give examples. Under what circumstances is mixedbundling more profitable than bundling?c) (12 marks) The table below indicates the willingness to pay for CDs by various types ofbuyers. There are N buyers of each type. Costs are $2.50 per CD. Find prices and profitswhen the seller offers the products (i) individually. (ii) as a bundle. (iii) individually and asa bundle (i.e. uses mixed bundling).CDsBerlioz/TchaikovskyBartok/StravinskyEC304Romantic$8$6Neoclassical$5$5Tchaikovsky lover$9$2Potential mid-term questionsSophisticate$2$9page 3 of 4Fall 20159.Cournot, Market Power and Market Concentration. Consider a market in which there aretwo firms who face the inverted industry demand given by P = 260 – Q. Each firm has zerofixed cost and constant marginal cost given by c1 for Firm 1 and c2 for firm 2.a) (10 marks). Let c1 = c2 = 170. Solve for the Cournot equilibrium outputs. Use yousolution to calculate the (i) Herfindahl index (H) (ii) Lerner Index (L) and (iii) industryelasticity () and (iv) Welfare (W). Verify that L = H/.b) (10 marks). Let c1 = 150 and c2 = 190. Repeat part a). Show that the increase in thevariance of marginal cost has caused H, L and W to rise.10.Cournot and entry. Consider an industry consisting of n firms that produce identicalproducts. There are N buyers in the market and each buyer has a demand curve given byqd = 20 – P where qd is the amount demanded by each buyer and P is the commonindustry price. The number of buyers N is a measure of market size. Market demand isequal to the amount demanded by all buyers and is thus given by Q = N(20 – P). Theinverted market demand curve is thus given by = 20 − . Each firm chooses output inCournot fashion and assumes that price is given by the inverted market demand curve.Each firm faces constant marginal cost equal to 10 per unit and a fixed cost equal to 100.a) (6 marks) Solve for the Cournot equilibrium level of (i) output per firm, (ii) industryoutput, (iii) price (iv) profit per firm as functions of the number of firms n and the numberof buyers N.b) (6 marks) If Cournot firms enter until profits are driven to zero then the find the level ofN required for (i) one firm to enter (ii) two firms to enter and (iii) 3 firms to enter.c) (8 marks). Suppose that N = 20 and n = 2. Use your solutions in a) to find welfare. If athird firm were to enter (n = 3) then determine whether this firm would earn positiveprofits and whether the entry of this firm would raise or lower welfare.EC304Potential mid-term questionspage 4 of 4Perfect competition, welfare and entryExplain in a few words whether the net welfare effect for the country as a whole is positive or negativeHealthcare Contracts Limitations Essaywhat explicit approach might the PMHNP take?