1.(a) True or false: market demand is more elastic than residual demand.
This statement is False because
(b) Why are marginal costs increasing? Why are they not always constant? You may giveexamples in some industries or just state two reasons at least.
(c)A monopolist faces the industry demand Q=400-0.5 p and has constant marginal costs of8, with no fixed costs.
a) (2.5 points) What is the monopoly price? What is the monopoly quantity?
b) (2.5 points) Without solving mathematically, just using economic theory based on thesolution in a), if price drops such that quantity increases from the one in a), by one very smallamount, would total revenue be higher?
2. Consider the market where there is product differentiation with two firms. The firms arechoosing prices p1 and p2 and have demands given by
q1 = 40 – 0.5 p1 + p2
q2 = 60 – 2 p2 + p1
a) (10 points) Assuming zero marginal and zero fixed costs, what are the firms’ best responsefunctions, that is best price of firm 1 given price of firm 2, and best price of firm 2 given price offirm one.
b) (5 points) What are the equilibrium levels of prices, and then the resulting quantities, andprofits? (do not set p1 equal to p2 as this is not necessarily the case, in a) you get two equationsin two unknowns, so please solve for p1 and p2 here.)
c) (5 points) Why do the firms get different profits in b)? Don’t they have the same costs? Pleaseexplain.
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3. In a store, we displayed under the price tag whether the popcorn product was a low fatpopcorn product. We were able to get data for before and after quantity sold for all popcornproducts, in treatment and in two possible control stores. We also got data on the size of the popcorn display shelf for all three stores in our data set as shown below. (2.5 points each a) through d) below)
TABLE
Retail Low Fat Experiment: Summary Statistics
Treated
Store
110
Store C1
Store C2
100
230
Average
Quantity
After(*)
130
160
300
Square
footage of
popcorn
shelves
150
149
260
Average
Quantity
before(*)
The “Treatment Store” is the store where the intervention took place; the “Control Stores” are two nearby stores in thesame retail chain, store C1 and store C2. Before period means weeks before experiment, after period means afterexperiment. (*) Average across weeks in Before and Average in Weeks in after period, respectively, average quantitysold is for all products sold e.g. week one 150 products are sold total, week 2 100, then average is 125 products).
a) Let C1 be the control. Give one reason as to why, given the table above, you choose thatone and not the other to measure the effect of the experiment.
b) Compute the effect of our nutritional labels. What do you conclude: do people appear to
like having a low fat label as measured by the responses in total popcorn sold in the
above table?
c) Suppose in Store C1 there was new rent-a-DVD display added during that same period
we ran the experiment. What would be the problem of using C1 as a control.
d) Given the problem in c) you have to use C2 as a control. How would you use the
information available to normalize the data and have somewhat comparable units?
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