Wuolah Free Exercises II

Exercises-II.
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Microeconomía. Mercados y Competencia
2º Grado en Administración y Dirección de Empresas
Facultad de Economía y Empresa

Universidad de A Coruña
Reservados todos los derechos.

No se permite la explotación económica ni la transformación de esta obra. Queda permitida la impresión en su totalidad.
Problem Set Chapter II:
Monopsony and Supply Chain
a64b0469ff35958ef4ab887a898bd50bdfbbe91a-7777896
(Chapter 2) Exercises Factor Markets 2020/2021. UDC 1 / 14
Reservados todos los derechos. No se permite la explotación económica ni la transformación de esta obra. Queda permitida la impresión en su totalidad.
Exercise 1
1. A firm that produces olive oil is the sole buyer of the olives that are
grown in the region. The firm is price taker in the olive oil market, with
p = 20 (per liter). Let q = 2x 1/2 be the firm’s production function, where
q denotes the liters of oil and x the kilos of olives. The (inverse) supply
function of olives is ω = 2x, where ω is the price of the olives (per kilo).
a) Obtain the market equilibrium (quantities, prices and profits) when

the firm that produces the olive oil is a monopsonist in the market
for olives.
b ) Compare the previous outcome with the situation in which the firm
is also price taker in the factor market.
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Solutions Exercise 1 i
a) The firm’s profit function in terms of the factor is:
√
π (x ) = pq (x ) − ω (x )x = 20 × 2 x − 2x × 2.
With the following FOC:

∂π (x )
∂x = 0 = 20 × 2 × 21 x −1/2 − 4x → x ms = 2.924.
We can now calculate the rest of the values:
ω ms = 5.848 → q ms = 3.42 → π ms = 51.3.
Solutions Exercise 1 ii
b ) The firm’s profit function in terms of the factor is:
√
π (x ) = pq (x ) − ωx = 20 × 2 x − ωx.
With the following FOC:

∂π (x )
∂x = 0 = 20 × 2 × 12 x −1/2 − ω → (pMPx = Sx ),
20x −1/2 = 2x → x CM = 4.642(△).
We can now calculate the rest of the values:
ω CM = 9.283(△) → q CM = 4.309(△) → π CM = 43.09(▽).
Solutions Exercise 1 iii
ω
MCxms
Sx
9.3 CM
5.8 ms
pMPx
2.9 4.6 x
Exercise 4
4. A given firm (A) produces car engines with the cost function C (x ) = 2x 2 ,
where x denotes the number of engines. Another firm (B) assembles the
engines and the other components of the cars according to a cost function
that, apart from the cost of the engines, entails an additional expenditure
of 8000q, where q denotes the number of cars. The demand of cars is
q = 20000 − p, where p denotes the price of the cars. Assume that this
second firm is a monopolist in the market for cars. Obtain the market
equilibrium for each one of the following scenarios in the factor market:
a) Firm A has market power, and hence firm B is price taker.

b ) Firm B has market power, and hence firm A is price taker.
c ) The two firms merge.
a) Let us start with the the price taker:
πB (x ) = p (q (x ))q (x ) − ωx − c ad (q (x )),
= (20000 − x )x − ωx − 8000x.
The firm maximises profits given ω:

∂πB
∂x = 0 = 20000 − 2x − ω − 8000 → ω = 12000 − 2x (:= Dx ).
Let us now focus on the price maker:

πA (x ) = ω (x )x − c (x ) = (12000 − 2x )x − 2x 2 .
∂πA Mp = 1500 = q Mp .
∂x = 0 = 12000 − 4x − 4x → x
We can finally calculate the rest of the values:

ω Mp = 9000 → p Mp = 18500,
πAMp = 9M → πAMp = 2.25M → πTMp = 11.25M,
CS Mp = 1.125M → W Mp = 12.375M.
b ) Let us start, once again, with the the price taker:
πA (x ) = ωx − c (x ) = ωx − 2x 2 .

∂πA
∂x = 0 = ω − 4x → ω = 4x (:= Sx ).

πB (x ) = p (q (x ))q (x ) − ω (x )x − c ad (q (x )),
= (20000 − x )x − 4xx − 8000x.
∂πB
∂x = 0 = 20000 − 2x − 8x − 8000 → x ms = 1200 = q ms .

ω ms = 4800 → p ms = 18800,
πAms = 2.88M → πAms = 7.2M → πTms = 10.08M,
CS ms = 0.72M → W ms = 10.8M.
c ) There is only one profit function:
πmg (x ) = p (q (x ))q (x ) − c (x ) − c ad (q (x ),
= (20000 − x )x − 2x 2 − 8000x.
The firms maximise joint profits:

∂πmg
∂x = 0 = 20000 − 2x − 4x − 8000 → x mg = 2000 = q mg .
ω mg = − → p mg = 18000,
mg
πT = 12M → CS mg = 2M → W mg = 14M.
Solutions Exercise 4 iv
p
MCxms
18.8 MC (x ) −Mpx
18.5
18.0 −msx
−mgx
p (q )
MRx Dx MRq
1.2 1.5 2
q
Exercise 5
5. In a given town the demand for bottled mineral water is described by
the expression q = 1000 − p, where q denotes the number of bottles of 1
liter and p the price per bottle. Firm B is the only firm in the region that
bottles this water, and it buys the raw material from firm A, at price ω per
liter. This second firm is the only distributor of water in the region. Assume
that A’s production is free of cost.
a) Obtain the market equilibrium (quantities, prices, profits, surplus and

social welfare).
b ) Compare the previous outcome with the situation in which the two
firms merge.
a) This is a double monopoly. Let us start with the the price taker:
πB (x ) = p (q (x ))q (x ) − ωx = (1000 − x )x − ωx.

∂πB
∂x = 0 = 1000 − 2x − ω → ω = 1000 − 2x (:= Dx ).
πA (x ) = ω (x )x − c (x ) = (1000 − 2x )x.
∂πA MM = 250 = q MM .
∂x = 0 = 1000 − 4x → x
ω MM = 500 → p MM = 750,
πAMM = 125000 → πAMM = 62500 → πTMM = 187500,
CS MM = 31250 → W MM = 218750M.
c ) If the two firms there is only one profit function:
πmg (x ) = p (q (x ))q (x ) − c (x ) = (1000 − x )x.
The firms maximise joint profits:

∂πmg
∂x = 0 = 1000 − 2x → x mg = 500 = q mg .
ω mg = − → p mg = 500,
mg
πT = 250000 → CS mg = 125000 → W mg = 375000.
p
750 MM
500
mg
p (q )
MRx MRq = Dx MC (x ) CM
250 500 q

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Exercises-II.

Microeconomía. Mercados y Competencia

2º Grado en Administración y Dirección de Empresas

Facultad de Economía y Empresa

Reservados todos los derechos.

a) Obtain the market equilibrium (quantities, prices and profits) when

With the following FOC:

We can now calculate the rest of the values:

ω ms = 5.848 → q ms = 3.42 → π ms = 51.3.

With the following FOC:

We can now calculate the rest of the values:

ω CM = 9.283(△) → q CM = 4.309(△) → π CM = 43.09(▽).

a) Firm A has market power, and hence firm B is price taker.

The firm maximises profits given ω:

Let us now focus on the price maker:

We can finally calculate the rest of the values:

The firm maximises profits given ω:

Let us now focus on the price maker:

We can finally calculate the rest of the values:

c ) There is only one profit function:

The firms maximise joint profits:

We can finally calculate the rest of the values:

a) Obtain the market equilibrium (quantities, prices, profits, surplus and

πB (x ) = p (q (x ))q (x ) − ωx = (1000 − x )x − ωx.

The firm maximises profits given ω:

Let us now focus on the price maker:

We can finally calculate the rest of the values:

c ) If the two firms there is only one profit function:

πmg (x ) = p (q (x ))q (x ) − c (x ) = (1000 − x )x.

The firms maximise joint profits:

We can finally calculate the rest of the values:

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