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Pset 10

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17 views2 pages

Pset 10

Pset 10

Uploaded by

shalujonwal05
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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14.

01, 2007 Fall


Problem Set 10
Due: December 7th

1. Please write your name, the name of your TA, and your section/recitation
time (e.g. MWF 10am, or F 1 pm) on top of your solutions.
2. Problem sets are due IN SECTION/RECITATION. Late Problem sets
will not be accepted under any circumstances.

Questions:

1. Are the following statements true, false or uncertain?


a. Since many of the products we buy every day are produced by firms that
compete in monopolistically competitive markets, the inefficiencies in our
economies are large because each market is generating some dead weight
loss.
b. The main reason why policymakers are concerned about inflation is be­
cause it raises wages, therefore costs of production. As a result output
and employment necessarily will go down.
2. Two firms with 0 marginal costs compete by choosing price. Their de­
mand functions are

Q1 = 20 − P1 + P2 (1)
Q2 = 20 + P1 − P2 (2)

a. Suppose the two firms choose their price simultaneously. What are the
prices, quantities and profits of each firm in the resulting Nash Equilib­
rium? How do we call this type of competition? How is it different from
Cournot competition? Why we do not get the result that P1 = P2 = M C?
b. Suppose Firm 1 sets its price first and Firm 2 sets its price after observing
Firm´s 1 price. What are the prices, quantities and profits in equilibrium?
c. What firm has an advantage in this setup? Why?

3. Firm A and B are deciding between producing high or low quality product.
The profit of each firm depends on the action taken by its competitor. The
payoff matrix is:
Firm B
H L
Firm A H 50, 40 60, 45
L 55, 55 15, 20

Cite as: William Wheaton, Chia-Hui Chen, Rongzhu Ke, Monica Martinez-Bravo, Marco Migueis, Peter Schnabl,
and Hongliang Zhang, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare
(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].
a. Find the maximin strategies of each firm.
b. Find the Nash Equilibria of this game. Explain why they are equilibria
by checking potential deviations.
c. Now suppose that the firms take their actions sequentially. Write the
extensive form game if Firm A moves first and find the equilibrium of
that game.
d. Suppose you are the CEO of Firm A and you still decide the quality of
the product first. The CEO of Firm B goes on national TV and says ”I
don´t care what Firm A is going to do. I´m going to produce high quality
products (H) because I don´t like low quality stuff”. What would you do?
e. What will be the equilibrium if Firm B moves first? Is there a first or
second mover advantage? How does this relate to your answer in 2d?
Why?
f. How is this game different than the Prisoner´s Dilemma.

4. Imagine you are a professor at MIT and you are considering hiring Re­
search Assistants (RA). If you hire an RA for L hours your RAs will
produce an amount of research output given by Q = 12L − L2 . You value
the output of their research by $10.
a. Find the Marginal Revenue Product of Labor and draw it.
b. Suppose there are 100 professors like you at MIT. Find the aggregate
demand for RA labor.
c. Students at MIT have a large opportunity cost for working as RA (spend­
ing their time studying 14.01), so their aggregate supply for RA work is
given by Ls = 15w. Find the wage of equilibrium in the MIT RA market.
d. How many hours of RA work would you hire at that wage?

e. Are the labor demands you found the conditional or the unconditional de­
mands? Briefly describe the difference between them and draw a diagram
showing both.

Cite as: William Wheaton, Chia-Hui Chen, Rongzhu Ke, Monica Martinez-Bravo, Marco Migueis, Peter Schnabl,
and Hongliang Zhang, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare
(http://ocw.mit.edu/), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY].

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