Econ 302

Homework #4

McLeod

Due in class Wednesday, March 30th.

Name ______________________________________________________
ID # ________________________________________________________
Instructions: Please Read Carefully
Please print out this form. The first sheet is intended only as a cover sheet. Do not write anything
on the first sheet except your name and ID #.
Please answer each question on the page provided. If you need extra space, you may use the back
of the sheet.
There are 50 possible points on this homework assignment. You may work together, but you MUST
WRITE UP YOUR OWN WORK and TURN IT IN, IN PERSON, AT THE BEGINNING OF
CLASS on Wednesday, March 30th. Late homework will not be accepted.

PLEASE STAPLE
YOUR
HOMEWORK!!

1. (23 points) Suppose a monopolist can purchase Labor at a price w = 1 and can purchase Capital at a
price r = 9. The monopolists production function is given by Q = L1/2K1/2. The demand facing the
monopolist is given by P = 78 6Q.
a) (8 points) What is the Monopolists total cost function?
TC = 6Q
Slope of Isoquant = Slope of Isocost (3 points)
L* = 3Q (1 points)
K* = 1/3Q (1 points)
TC = w*L +r*K (1 points)
TC = 6Q (2 points)

b) (1 points) What is the Monopolists Marginal Cost?

MC = 6

c) (14 points) Complete the following table. In the first column, find the values for the Monopolist. In
the second column, find the values if the market were instead perfectly competitive.
(1 point each)
Price
Quantity of Output
Quantity of Labor used (L*)
Quantity of Capital used (K*)
Consumer Surplus
Producer Surplus
Deadweight Loss
Lerner Index

Monopoly
42
6
18
2
108
216
108
6/7

Perfect Competition
6
12
XXXXX
XXXXX
432
0
0
0

2. (9 points) Suppose there are n identical firms in a market. Each firms cost function is given by C =
648 + 8q2, where q is the amount that an individual firm produces. This means that an individual firms
marginal cost is given by MC = 16q. Also, the market demand is given by P = 306 3Q, where Q is the
total amount of the good produced by all of the firms combined. Therefore, Q = n*q.
a) (3 points) How much output will each firm produce?
q=9

b) (3 points) What will be the market price?

P = 144

c) (3 points) How many firms will there be in long run equilibrium?

n=6

3. (9 points) Suppose that two players are playing the following game. Player 1 can choose either Top or
Bottom, and Player 2 can choose either Left or Right. The payoffs are given in the following table:

Player 1

Top
Bottom

Left
6
1

Player 2
Right
2
2
0
0

1
3

where the number on the left is the payoff to Player A, and the number on the right is the payoff to Player
B.
A) (1 point) Does player 1 have a dominant strategy, and if so what is it? YES--TOP
B) (1 point) Does player 2 have a dominant strategy and if so what is it? NO
C) (1 point each) For each of the following strategy combinations, write TRUE if it is a Nash
Equilibrium, and FALSE if it is not:
i) Top/Left True
ii) Top/Right False
iii) Bottom/Left False
iv) Bottom Right False

D) (1 point) What is Player 1s maximin strategy? TOP

E) (1 point) What is player 2s maximin strategy? RIGHT
F) (1 points) If the game were played with Player 1 moving first and player 2 moving second, using the
backward induction method we went over in class, what strategy will each player choose?
TOP/LEFT or (6,2)

4. (9 points) (Cournot Duopoly). Suppose there are two firms, Firm 1 and Firm 2 in a market. Each
firm simultaneously chooses a quantity of output to produce (q 1 and q2). Total market output is given by
Q = q1 + q2. The market demand curve determines the price to clear the market. Market demand is
given by P = 112 4Q. Also, each firm produces at a constant marginal cost, MC = 16.

a) (3 points) What is Firm 1s Best Response function?

q1 = 12 q2

b) (4 points) How much output will each firm produce in the Cournot-Nash equilibrium?
q1 = q2 = 8

c) (2 points) What is the deadweight loss in this market?

DWL = $128