Market structures

1. SIM corporation manufactures and sells a line of tablets with the total cost as TC = 800 + 40Q + Q2.
Firm’s objective is to maximize profit. There are two cases
- SIM is a perfect competitive firm in which market price is P = 160
- SIM is a monopoly firm in which market demand is P = 300 - Q
a. Express ATC, AVC, AFC, MC in term of Q.
b. Express total profits (p) in terms of Q for each case
c. In each case, what level of output are total profits maximized? What price will be charged? What is revenue,
what is profit?
d. For the case of monopoly, what level of output that gives maximum revenue, what is the price and revenue.
e. Compare and analyse the results

2. Imagine that two oil companies, BQ and Exxoff, own adjacent oil fields. Under the fields is a
common pool of oil worth $144 million. Drilling a well to recover oil costs $5 million per well. If
each company drills one well, each will get half of the oil and earn a $67 million profit ($72 million
in revenue - $5 million in costs). Assume that having X percent of the total wells means that a
company will collect X percent of the total revenue. (1) If BQ and Exxoff are able to successfully
cooperate to maximize their joint profits, how much each firm will earn? (2) Find the dominant
strategy of each firm, (3) what is Nash equilibrium? (4) IS THIS PRISONER’S DILEMMA GAME?

3. In this payoff matrix for the location strategies of companies for Mega
the only two supermarket at the local province. The payoff (15,17)
means that Super profit is 15 and 17 for Mega respectively. Super Area A Area B
a. Find the dominant strategy for each company (if any), briefly explain.
b. Find the Nash Equilibrium (if any). Is it a prisoner’s dilema?
Area A 15, 17 12,13
c. If Mega has the right to go first, what is the choice and final equilibrium?
d. If Super has the right to go first, what is the choice and final equilibrium?
Area B 10,12 18,19

4. Grab and Goviet are the only bus services in a small town. Each Company can choose to set a high
price or a low price for service due to limited choice of transportation. The payoff matrix below
shows the daily profits for each combination of prices. In the payoff matrix (X,Y), the first entry
shows Grab’s profits, and the second entry shows Goviet’s profits. Assuming that both companies
know the information shown in the matrix.
Goviet a. Find the dominant strategy for each company (if any), briefly explain.
b. Find the Nash Equilibrium (if any). Is it a prisoner’s dilema?
Low Price High Price c. Government wants people can access the low price bus service. It
decides to give a subsidy of 10 to any firm that set low price. Redraw
Low Price 75, 80 95, 75 the payoff matrix under the government subsidy system. Redraw the
Grab
High Price 80, 90 98, 102 matrix and answer the question (a) and (b) again (2).

5. There are two cable TV, each digital cable TV operator pays a fixed cost of $200,000 (per year) and
that the marginal cost of providing the premium channel service to a household is zero.

Quantity Price Revenue Profit a. If they are able to COLLUDE on the quantity of subscriptions, then
their agreement will stipulate that each firm will charge price and
0 $180 0 quantity of subscriptions at
3,000 $150 $450.000 a.. P= $90, Q= 4,500 b. P= $90, Q= 9,000
c. P= $120, Q= 3,000 d. P= $150, Q= 1,500
6,000 $120 $720.000
9,000 $ 90 $810.000 b. If they are able to COLLUDE on the quantity of subscriptions. How
much profit will EACH COMPANY earn?
12,000 $ 60 $720.000 a. $610,000 b. $550,000
c. $405,000 d.. $205,000
15,000 $ 30 $450.000
18,000 $ 0 $0
6. Rochelle and Alec, own wells that produce safe drinking water. They bring the water to town and
sell it at whatever price the market will bear. Suppose that Rochelle and Alec can pump as much
water as they want without cost so that the marginal cost of water equals zero.

Quantity Price Revenue Profit

0 $60 $0 a. If Two firms operate as a profit-maximizing monopoly in the market,
what price will they charge?
100 55 5,500
a. $25 b. $30 c. $35 d. $40
200 50 10,000
300 45 13,500 b. If two firms operate as a profit-maximizing monopoly in the market,
how much profit will each of them earn?
400 40 16,000
a. $8,050 b. $8,500 c. $9,000 d. $18,000
500 35 17,500
600 30 18,000 c. If they are unable to cooperate. What will be the price once Rochelle
and Alec reach a Nash equilibrium?
700 25 17,500
a. $15 b. $20 c. $25 d. $30
800 20 16,000
900 15 13,500 d. How many gallons of water will be produced and sold once Rochelle
and Alec reach a Nash equilibrium?
1,000 10 10,000
a. 600 b. 700 c. 800 d. 900
1,100 5 5,500
1,200 0 0

7. The information in the table below shows the total demand for internet radio subscriptions in a
small urban market. Assume that each company that provides these subscriptions incurs an
annual fixed cost of $20,000 (per year) and that the marginal cost of providing an additional
subscription is always $16.
be charged for subscriptions, then their agreement will
stipulate that each firm will
Quantity Price Cost Revenue Profit
a. charge a price of $40 and sell 1,500 subscriptions.
b. charge a price of $40 and sell 3,000 subscriptions.
1,500 $52
c. charge a price of $32 and sell 2,000 subscriptions.
2,000 $48 d. charge a price of $20 and sell 3,000 subscriptions.
3 Further assume that they are able to collude on the
2,500 $44 quantity of subscriptions that will be sold. If the firms
divide the market evenly, how much profit will each
3,000 $40 company earn?
a. $10,000
3,500 $36 b. $12,000
c. $16,000
4,000 $32
d. $20,000
4,500 $28 4 Further assume that they are not able to collude on
the price and quantity of subscriptions to sell. How
5,000 $24 many subscriptions will be sold altogether when this
market reaches a Nash equilibrium?
5,500 $20 a. 2,000
b. 3,000
6,000 $16 c. 4,000
d. 5,000
5. Further assume that they are not able to collude on
1 Suppose there is only one internet radio provider the price and quantity of subscriptions to sell. How
in this market and it seeks to maximize its profit. much profit will each firm earn when this market
The company will reaches a Nash equilibrium?
a. sell 2,000 subscriptions and charge a price of $48. a. $12,000
b. sell 3,000 subscriptions and charge a price of $40. b. $16,000
c. sell 4,000 subscriptions and charge a price of $32. c. $52,000
d. sell 5,000 subscriptions and charge a price of $24. d. $64,000
2 If they are able to collude on the quantity of
subscriptions that will be sold and on the price that will