FACULTY OF ECONOMICS AND FINANCE
DEPARTMENT OF ECONOMICS
SUBJECT NAME AND CODE OF MODULE:
MICROECONOMICS II: MIC206D
Group Assignment – (Min 5 people – Max 10 People)
By
Mr. E.M MASHAYAMOMBE
Due Friday 14 January 2022
1|P a ge
1. The Success of Supermarkets in some country’s supermarkets dominate food
shopping. In the UK 75% of the food bought for home use comes from
supermarkets. A third of that comes from one supermarket, Tesco. Tesco
makes billions of pounds profit, one third of which goes to the government in
taxes. It employs 110 000 people in the UK and many more in developing
countries. In the past, UK shoppers queued to buy expensive food from many
small shops with limited choice and restricted opening times. Now, in
supermarkets, they have the benefit of a wide choice, reasonable prices,
international dishes, organic produce, fair trade items, clear labels of the
contents of the products and, because of intense competition between the
supermarkets, some open 24 hours. However, the media complain that
supermarkets are not competitive but monopolies. They say their profits are too
high, they have caused small shops to close and forced suppliers in developing
countries to accept low prices and to pay low wages. It must be remembered
that supermarkets grew because they gave the customer what they wanted and
aimed at certain types of shoppers. One supermarket, which started as a small
shop, insisted on selling only high-quality products while another offered
customers low prices. Supermarkets also adapted to changing market trends.
One began to supply products with its own brand name which were sold more
cheaply because there were no advertising costs. A further brilliant idea in
expanding their business was the introduction of a store loyalty card. Shoppers
with a loyalty card are given discounts which encourages them to continue to
shop in the same supermarket. The most successful supermarkets expanded
their businesses by buying large sites to build huge stores. (They are criticised
for such building, especially if it destroys parts of the countryside or
environment.) They expanded into non-food products to fill these stores,
making it possible for consumers to buy many household items from clothes to
kitchen utensils to electrical goods in the same shop. Supermarkets have also
recently introduced on-line shopping and home deliveries. Many small shops
have closed. There are bound to be casualties in retailing. How can the blame
for that be the fault of the supermarket? Their size should not be a concern. It
is, after all, the consumer who decides where to shop and what to buy.
2|P a ge
1.1 How has the type of market structure in food retailing in the UK changed?
(3)
1.2 To what extent does the article support the view that the consumer is
sovereign in food retailing?
1.3 Explain what the various objectives of a firm might be.
(4)
(5)
1.4 Do you agree with the conclusion of the article that the size of a firm should
not be a source of concern?
(8)
2. Use diagrams to explain the difference in efficiency in the long run position for
a competitive market structure and a monopolistic market structure.
(10)
3. Explain the conditions that should hold if a firm is to perfectly price discriminate
(6)
4. Price discrimination requires the ability to sort customers and the ability to
prevent arbitrage. Explain how the following can function as price discrimination
schemes and discuss both sorting and arbitrage:
4.1 Requiring airline travellers to spend at least one Saturday night away from
home to qualify for a low fare.
(3)
4.2 Insisting on delivering cement to buyers and basing prices on buyers’
locations.
(3)
4.3 Selling food processors along with coupons that can be sent to the
manufacturer for a $10 rebate.
(3)
4.4 Offering temporary price cuts on bathroom tissue. e. Charging high-income
patients more than low-income patients for plastic surgery.
(3)
5. Use diagrams to explain first, second- and third-degree price discrimination
(15)
6. Does a monopoly’s ability to price discriminate between two groups of
consumers depend on its marginal cost curve? Why or why not? Consider two
cases: (a) the marginal cost is so high that the monopoly is uninterested in
3|P a ge
selling to one group, and (b) the marginal cost is low enough that the monopoly
wants to sell to both groups.
(10)
7. To examine the trade-off between efficiency and market power from a merger,
consider a market with two firms that sell identical products. Firm 1 has a
constant marginal cost of 1, and Firm 2 has a constant marginal cost of 2. The
market demand is Q = 15 - p.
7.1 Solve for the Nash-Cournot equilibrium price, quantities, profits, consumer
surplus, and deadweight loss.
(15)
7.2 If the firms merge and produce at the lower marginal cost, how do the
equilibrium values change?
(5)
7.3 Discuss the change in efficiency (average cost of producing the output) and
welfare—consumer surplus, producer surplus (or profit), and deadweight
loss—if the firms merge.
(5)
8. Suppose the airline industry consisted of only two firms: American and Texas
Air Corp. Let the two firms have identical cost functions, C(q) = 40q. Assume
that the demand curve for the industry is given by P = 100 − Q and that each
firm expects the other to behave as a Cournot competitor.
8.1 Calculate the Cournot-Nash equilibrium for each firm, if each chooses the
output level that maximizes its profits when taking its rival’s output as given.
What are the profits of each firm?
(12)
8.2 What would be the equilibrium quantity if Texas Air had constant marginal
and average costs of $25 and American had constant marginal and average
costs of $40?
(6)
8.3 If both firms have the original cost function, C(q) = 40q, how much should
Texas Air be willing to invest to lower its marginal cost from 40 to 25, if
American will not follow suit? How much should American be willing to
spend to reduce its marginal cost to 25, if Texas Air will have marginal costs
of 25 regardless of American’s actions?
(6)
4|P a ge
9. Game theory
9.1 What is the difference between a cooperative and a noncooperative game?
Give an example of each.
(4)
9.2 What is a dominant strategy? Why is an equilibrium stable in dominant
strategies?
(4)
9.3 Explain the meaning of a Nash equilibrium. How does it differ from an
equilibrium in dominant strategies?
(4)
9.4 Explain your understanding of the prisoners’ dilemma game and give an
example of a pay-off matrix in this game.
(9)
10. Two firms are in the chocolate market. Each can choose to go for the high end
of the market (high quality) or the low end (low quality). Resulting profits are
given by the following payoff matrix:
10.1
What outcomes, if any, are Nash equilibria?
(4)
10.2
What is the cooperative outcome?
(4)
10.3
Which firm benefits most from the cooperative outcome? How much
would that firm need to offer the other to persuade it to collude?
(4)
TOTAL - 155
5|P a ge