Jones International University

Economic Theory and Application

Assignment 4.1

Technical Questions: 1, 3 and 5 of Chapter 9 & 10

Chapter 9 1. The following graph: (not able to recreate, but in the text), shows a firm with a kinked demand curve a. What assumption lies behind the shape of this demand curve? The kinked demand curve assumes that other firms will follow price decreases and will not follow price increases. For instance, in an oligopoly model, based on two demand curves that assumes that other firms will not match a firm’s price increases, but will match its price increases. The kinked demand curve model of oligopoly implies that oligopoly prices tend to be “sticky” and do not change as

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I can assume that when we read (0,0), both players drive on the left or both players drive on the right. Therefore there are two Nash equilibriums, both with (0,0), when either both players drive on the left or both players drive on the right. If each player has chosen a strategy and no player can benefit by changing his or her strategy while the other players keep theirs unchanged, then the current set of strategy choices and the corresponding payoffs constitute a Nash equilibrium.

c. Why is this called a cooperative game? This is a cooperative game because both players benefit from a cooperative solution; there is no incentive to cheat, the drivers do not want to wreck. There is no dominant strategy in this game because no single strategy is better in all cases.

A monopolist has a constant marginal and average cost of $10 and faces a demand curve of QD = 1000 – 10P. Marginal revenue is given by MR= 100 – 1/5 Q. a. Calculate the monopolist’s profit-maximizing quantity, price and profit. QD= 1000 – 10P or P = 100 – 1/10QD; MR= 100 – 1/5Q; MC =AC = 10. Set MR=MC .100 – 1/5Q= 101/5Q= 90Q= 450 Put quantity into the demand curve equation to find price. P = $55.Profit =TR– TC = (55)( 450) – (10)(450) = $24,750 –