09 Jul Economics- Project 2
Instructions
-If you consult any sources, you must cite them properly.
-Label the axes of any graphs you draw.
-Do not exceed the space allotted for each question.
-Format is either double or single and a half-spaced, 12 pt. font, and 1 inch margins.
1. (15 points per part. Limit is one page for each part. Graphs may be on separate pages and are not part of the page limit)
a. When we calculated the deadweight loss of monopoly in class, we assumed that both the monopoly and the competitive firm had the same marginal cost function. Explain what would happen to the deadweight loss to society if the monopolist’s marginal cost was lower than that of a competitive industry. Think of one or two examples of monopoists with zero marginal cost. This question requires a graph which does not count towards the page limit.
b. If a natural monopoly is regulated to make zero economic profit, it will produce less than a competitive industry. On the other hand, if a regular monopoly (not natural monopoly) is regulated to make zero economic profit, it will produce more than a competitive industry. Are these TWO statements true or false? Explain why. At least one graph is required for this question.
c. Physicians often charge poorer customers lower fees for medical services. They usually explain this as a charitable gesture. Alternatively, could this be a profit-maximizing strategy? Explain. (Do not complicate this question by including health insurance, please.)
2. (20 points. Limit one page) Traditional games of “chicken” typically have a winner and a loser with the winner adopting some kind of commitment strategy to force her opponent to swerve and lose the game. The readings,” Release Dates” and “Release Dates 1” discuss some of the strategies used in the movie industry. Use an example from the business world (not movie release dates) to discuss what factors are behind commitment and accommodation strategies in these types of games. What is the best way of committing to a “stay” strategy? Should you always accommodate and “swerve” once your opponent has committed? Why or why not? A game matrix is optional for this question. It does not count against the page limit.
3. (20 points. Limit one page) Give an example of (i) a positive externality, and (ii) a negative externality and explain how a social inefficiency is created in each case. Explain why this is a market failure. Suggest a solution to the externality problem in each of your examples and explain how it would work in practice. At least one of your solutions must be free-market based. Your examples may not come from class or from the text. Originality will be rewarded! Graphs are optional.
4. (15 points. Limit one page) Collusion is more successful in a game that will continue forever or in a game with an uncertain ending time rather than a game with a known end time. Is this statement true? Carefully explain your answer.
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