Market Structures
(Mankiw, chapter 14,15,16,17)
Practice 1
1. OISP corporation manufactures and sells a line of tablets with the total
cost as TC = 200 + Q + Q^2. Firm’s objective is to maximize profit. There are
two cases
- OISP is a perfect competitive firm in which market price is P = 50
- OISP is a monopoly irm in which market demand is P = 100 − Q
a. Express ATC, AVC, AFC, MC in term of Q.
b. Express total profits (π) 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.
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Practice 2
2. SIM corporation manufactures and sells a line of tablets with the total cost as
TC = 800 + 40Q + Q^2. 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 (π) 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.
Practice 3
3. In this payoff matrix for the location strategies of
companies for the only two supermarkets at the local
province. The payoff (15,17) means that Super profit
is 15 and 17 for Mega respectively.
a. Find the dominant strategy for each company (if
any), briefly explain.
b. Find the Nash Equilibrium (if any). Is it a
prisoner’s dilemma?
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?
Mega
Super
Area A
Area B
Area A
15, 17
12,13
Area B
10,12
18,16
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Practice 4
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.
a.
Discuss whether both players have or do not have a dominant
strategy.
b.
Find Nash equilibrium (if any). Is this a prisoner’s dilemma game?
c.
If Grab has the right to set price first, what will be the result. If
Goviet has the right to set price first, find the result.
d.
The town government is concerned that the transportation cost are
too high. It decides to give a daily subsidy of 10 to any company
that chooses to set a low price. Redraw the payoff matrix under the
government subsidy system. Find the dominant strategy (if any)
and the Nash equilibrium (if any). Discuss the effectiveness of such
subsidy policy?
Grab
Low
Price
High
Price
Low
Price
High
Price
75, 80
95, 75
80, 90
98, 102
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