EC102: Class 8 Christina Ammon

Question 1 Consider the initial situation of the tablet market in which Apple is a monopolist thanks to its Ipad. Suppose that Apple spends £2,000,000 on a new advertising campaign in the UK. As a result, the demand for Ipad shifts up by £10 per tablet at all output levels. This means that the marginal revenue curve for Ipad: Shifts upwards by £10 Shifts downwards by £10 Shifts upwards by £2,000,000 Shifts downwards by £2,000,000

Question 2 Consider the initial situation of the tablet market in which Apple is a monopolist thanks to its Ipad. Suppose that Apple spends £2,000,000 on a new advertising campaign in the UK. As a result, the demand for Ipad shifts up by £10 per tablet at all output levels. This implies that in equilibrium of the tablet market: Quantity increases and price increases Quantity decreases and price increases Quantity increases and price decreases Quantity decreases and price decreases

Question 3 When there are more than n3 firms in the industry, the representative firm faces a situation in which: Average cost is above average revenue Marginal cost is above marginal revenue Marginal cost is below marginal revenue Average cost is above marginal revenue

Question 4 Consider an air transportation market in which two firms, Air Lion and Beta Airlines, compete for passengers. If Beta Airlines sells tickets for 100 seats per day, Air Lion’s daily residual demand: Shifts upwards by 100 Shifts downwards by 100 Shifts leftwards by 100 Shifts rightwards by 100

Question 5 Suppose Air Lion and Beta Airlines reached an agreement to have Beta sell 550 tickets per day and Air Lion 100 tickets per day. Would each firm want to stick to this agreement if the other did? Yes, the agreement implements a Nash-Cournot equilibrium. No, because both firms have an incentive to deviate from the agreement No, because Beta Airlines has an incentive to deviate from the agreement No, because Air Lion has an incentive to deviate from the agreement

Question 6 Consider an oligopoly with two identical firms that split the market equally. Call εmkt the price elasticity of the market demand curve and εfirm the price elasticity of the firm-specific demand curve. The relation between the two elasticities is εfirm = εmkt/m where m is firm market share. When the price elasticity of market demand is 1, we have that: Price is equal to marginal cost Price is half marginal cost Price is double marginal cost Price is lower than marginal cost

Question 6 m=0.5 εfirm = εmkt/m =1/0.5=2 => More elastic MR=p × (1−1/εfirm) =MC p × (1-1/2)=MC P=2*MC

Question 7 Consider an oligopoly with identical firms that split the market equally. Call εmkt the price elasticity of the market demand curve and εfirm the price elasticity of the firm-specific demand curve. The relation between the two elasticities is εfirm = εmkt/m where m is firm market share. When the price elasticity of market demand is 1, after an increase in the number of firms from two to four: Price rises by less than 50% Price falls by less than 50% Price rises by more than 50% Price falls by more than 50%

Question 7 Before: had p=2*MC=2c Now m falls to 0.25 Elasticity of the firm rises to 4 Again optimisation implies: MR=p × (1−1/εfirm) =MC p × (1-1/4)=MC P=4/3*MC Percentage fall= (2c-4/3c)/2=1/3<50%

Question 8 “Game theory, however, deals only with the way in which ultrasmart, all knowing people should behave in competitive situations, and has little to say to Mr. X as he confronts the morass of his problem.” (Howard Raiffa)