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Rivera Claire Polscie 2

The document provides explanations of microeconomic concepts: 1) Under perfect price discrimination, a firm charges each consumer their maximum willingness to pay and produces the competitive level of output. 2) If monopolistically competitive firms merged, the new firm would likely produce multiple brands to practice a form of price discrimination, rather than a single brand. 3) A Nash equilibrium occurs when players believe they cannot increase payoffs by changing strategies, given the other player's action, whereas dominant strategies do not depend on the opponent.

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Paula Pauly
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74 views

Rivera Claire Polscie 2

The document provides explanations of microeconomic concepts: 1) Under perfect price discrimination, a firm charges each consumer their maximum willingness to pay and produces the competitive level of output. 2) If monopolistically competitive firms merged, the new firm would likely produce multiple brands to practice a form of price discrimination, rather than a single brand. 3) A Nash equilibrium occurs when players believe they cannot increase payoffs by changing strategies, given the other player's action, whereas dominant strategies do not depend on the opponent.

Uploaded by

Paula Pauly
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Microeconomics

Claire Rivera PS-2

1. Suppose a firm can practice perfect, first degree price discrimination. What
is the lowest price it will charge, and what will its total output be?

When a firm practices perfect first-degree price discrimination, each unit is sold
at the reservation price of each consumer (assuming each consumer purchases
one unit). Because each unit is sold at the consumer’s reservation price,
marginal revenue is simply the price at which each unit is sold,
and thus the demand curve is the firm’s marginal revenue curve. The profit-
maximizing output is therefore where MR  MC, which is the point where the
marginal cost curve intersects the demand curve. Thus the price of the last unit
sold equals the marginal cost of producing that unit, and the firm produces the
perfectly competitive level of output.

2. Suppose all firms in a monopolistically competitive industry were merged


into one large firm. Would that new firm produce as many different brands?
Would it produce only a single brand? Explain.

Monopolistic competition is defined by product differentiation. Each firm earns


economic profit by distinguishing its brand from all other brands. This distinction
can arise from underlying differences in the product or from differences in
advertising. If these competitors merge into a single firm, the resulting monopolist
would not produce as many brands, since too much brand competition is
internecine (mutually destructive). However, it is unlikely that only one brand
would be produced after the merger. Producing several brands with different
prices and characteristics is one method of splitting the market into sets of
customers with different tastes and price elasticities. The monopolist can sell to
more consumers and maximize overall profit by producing multiple brands and
practicing a form of price discrimination.

3. Explain the meaning of Nash equilibrium. How does it differ from an


equilibrium in dominant strategies ?
A Nash equilibrium is an outcome where both players correctly believe that they are
doing the best they can, given the action of the other player. A game is in equilibrium if
neither player has an incentive to change his or her choice, unless there is a change by
the other player. The key feature that distinguishes a Nash equilibrium from an
equilibrium in dominant strategies is the dependence
on the opponent’s behavior. An equilibrium in dominant strategies results if each player
has a best choice, regardless of the other player’s choice. Every dominant strategy
equilibrium is a Nash equilibrium but the reverse does not hold.

4. Why is a firm’s demand for labor curve more inelastic when the firm has
monopoly power in the output market than when the firm is producing
competitively ?

The firm’s demand curve for labor is determined by the incremental revenue from
hiring an additional unit of labor, known as the marginal revenue product of labor.
MRPL  (MPL)(MR) is the additional output (“product”) that the last worker
produced, times the additional revenue earned by selling that
output. In a competitive industry, the marginal revenue curve is perfectly elastic
and equal to price.For a monopolist, marginal revenue is downward sloping. As
more labor is hired and more output is produced, the monopolist will charge a
lower price and marginal revenue will diminish. All else the
same, marginal revenue product will therefore fall more quickly for the
monopolist. This implies that the marginal revenue product curve (the demand
curve for labor) will be steeper for the monopolist and hence more inelastic than
for the competitive firm.

5. You have notice that bond prices have been rising the past few months .
All else equal, what does this suggest has been happening to interest
rate ?
 Bond prices are inversely related to interest rates. When interest rates go up,
bond prices go down, and vice versa. Interest rate risk arises when the absolute level
of interest rates fluctuate. Interest rate risk directly affects the values of fixed income
securities. Since interest rates and bond prices are inversely related, the risk associated
with a rise in interest rates causes bond prices to fall and vice versa.
Interest rate risk affects the prices of bonds, and all bondholders face this type of risk.
As mentioned above, it's important to remember that as interest rates rise, bond prices
fall. When interest rates rise and new bonds with higher yields than older securities are
issued in the market, investors tend to purchase the new bond issues to take advantage
of the higher yields.
For this reason, the older bonds based on the previous level of interest rate have less
value, and so investors and traders sell their old bonds and the prices of those
decrease.
Conversely, when interest rates fall, bond prices tend to rise. When interest rates fall
and new bonds with lower yields than older fixed-income securities are issued in the
market, investors are less likely to purchase new issues. Hence, the older bonds that
have higher yields tend to increase in price.
6. In the Edgeworth box diagram, explain how one point can simultaneously
represent the market baskets owned by two consumer.
The Edgeworth box diagram allows us to represent the distribution of two goods
between two individuals. The box is formed by inverting the indifference curves of one
individual and superimposing these on the indifference curves of another individual. The
sides of the box represent the total amounts of the two goods available to the
consumers. For example, the height of the vertical axis represents the total amount of,
say, clothing that is available. For any point in the diagram, the vertical distance
between the point and the bottom of the box is the amount of clothing that one
consumer has, and the vertical distance between the point and the top of the box is the
amount of clothing owned by the other consumer. Likewise, the horizontal distance
between the point and the left side of the box represents the amount of the other good,
say food, belonging to the first consumer and the distance to the right side of the box is
the amount of food the other consumer has. Therefore, each point in the box represents
a different allocation of the two goods between the two individuals.
7. If the used car market is “lemons “ market how would you expect the
repair record of used cars that are sold to compare with the repair record
of those not sold ?
In the market for used cars, the seller has a better idea of the quality of the used car
than does the buyer. The repair record of the used car is one indicator of quality. One
would expect that, at the margin, cars with good repair records would be kept while cars
with poor repair records would be sold. Thus, one would expect the repair records of
used cars that are to be sold to be worse than those of used cars not sold.
8. Externalities arise solely because individuals are unaware of their actions .
Do you agree or disagree? Explain.
Disagree. It is not that people are unaware but that they have no economic incentive to
consider and account for all of the consequences of their actions. If a firm dumps waste
into a river that affects a swimming area downstream, it is generating a negative
externality for the people downstream. This action maximizes the firm’s profit if the firm
incurs no private costs for dumping and is not forced to consider the external costs it is
imposing on users of the swimming area. This is true whether the firm is aware of these
social costs or not.

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