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Department of Economics, CSUS Economics 1B Fall 2002

Name:____________________ Section Number:____________

Problem Set 4
Due Tuesday November 12th at the beginning of lecture Write all ans ers neatl! on t"e pa#es #i$en% Dra all #rap"s in t"e space pro$i&e& an& rite &escriptions un&er t"e 'uestions% S"o all of !our or(% )ou ma! &iscuss 'uestions !ou "a$e it" ot"er stu&ents, but !our ans ers nee& to be in !our o n or&s% *ns ers t"at appear to be copie& from anot"er stu&ent ill recei$e a #ra&e of +ero%

1. Monopoly
a% E,plain intuiti$el! "! mar#inal re$enue is less t"an price for a monopol!% -n or&er to sell an a&&itional unit of output, e must re&uce t"e price e c"ar#e on all units% ."erefore, t"e e,tra re$enue e #et from sellin# one a&&itional unit is less t"an t"e price e recei$e for t"e mar#inal unit, so mar#inal re$enue is less t"an price% b% Dra a #rap" of &eman&, mar#inal re$enue, mar#inal cost, an& a$era#e total cost for t"e monopol! Eli /il! "as for t"e &ru# 0ro+ac% -llustrate #rap"icall! t"e effect of a &ecrease in &eman& for 0ro+ac, resultin# from e,piration of t"e &ru#1s patent, on profit ma,imi+in# 'uantit!, price, an& profits% -t ma! "elp to use t o colors% 0 2C 01 02 *.C

D1 31 242 241 0ro+ac Deman& an& mar#inal re$enue bot" s"ift in% 0rice, 'uantit! an& profits all &ecrease% ."e lar#e s"a&e& area, it" sin#le an& &ouble "atc" mar(s, is t"e ori#inal area of profits% ."e smaller area, it" t"e &ouble "atc" mar(s is t"e ne area of profits% 32 D2 3

2. Natural Monopoly
2icrosoft is bein# accuse& of usin# unfair tactics to tr! to limit competition% For e,ample, it pac(a#e& -nternet E,plorer it" Win&o s 56 in a a! t"at pro"ibite& users from remo$in# E,plorer% 2icrosoft sa!s it is 7ust #i$in# a a! an e,tra feature, an& pro&ucin# t"e best pro&uct possible for t"e consumer% -t claims t"at Win&o s is becomin# t"e stan&ar& operatin# s!stem because t"e! pro$i&e t"e best pro&uct, not because of an! acti$ities &esi#ne& to eliminate competition% -n fact, t"e! belie$e t"e "i#" tec" mar(et is one of t"e most competiti$e aroun&% a8 Do !ou t"in( 2icrosoft "as a monopol! o$er t"e mar(et for &es(top operatin# s!stems9 Discuss%

2icrosoft is t"e stan&ar& use& across most of t"e business orl&% 2ac :;S an& Uni,;/inu, also "a$e operatin# s!stems, but t"ese are not use& as fre'uentl! in t"e business orl& as 2icrosoft, so 2icrosoft effecti$el! controls t"e mar(et for &es(top operatin# s!stems, an& "as a $irtual monopol!%

imi+in# consumer surplus. because at t"is lo price 2icrosoft oul& be earnin# ne#ati$e profits.C 2C 3m 3ac 3 2icrosoft 24 .C% . an& mo$e from one 7ob to anot"er it"out "a$in# to learn a ne operatin# s!stem% 2icrosoft1s operatin# s!stems are alrea&! prett! reasonable. "ile ensurin# t"at 2icrosoft oul& sta! in business. an& constant as 'uantit! rises% &8 W"at c"aracteristics of a natural monopol! &oes 2icrosoft possess9 2ar#inal cost &oesn1t increase as 'uantit! increases. an& label profits at t"is price% /abel price an& 'uantit! t"at ma.imi+e profits."e #o$ernment coul& not impose t"e sociall! optimal price on 2icrosoft. to tr! to sell more oil at t"e "i#" cartel price% .tra cost of pro$i&in# an a&&itional CD=4:2 to one more customer is reall! lo .C > Deman&% . !ligopoly and Nash "#uilibrium :0EC is a cartel of ma7or oil pro&ucin# countries t"at attempts to restrict t"e amount of oil sol& on t"e orl& mar(et. in or&er to (eep prices "i#"% *t an! point in time."e problem is t"at if e$er! countr! c"eats. eac" countr! in t"e cartel "as an incenti$e to c"eat. s"are computer files. CSUS Economics 1B Fall 2002 Name:____________________ Section Number:____________ b8 -f it is a monopol!. an& it oul& be &ifficult for ot"er companies to pro&uce a ne stan&ar& at a lo er cost% c8 <o &oes t"e mar#inal cost of pro$i&in# Win&o s c"an#e as 'uantit! pro&uce& increases9 2ar#inal cost &oesn1t increase as 'uantit! increases. &o !ou t"in( it oul& be more efficient to "a$e multiple operatin# s!stems in use. suppl! increases. since price is less t"an *. ma. t"e e. oul& be to impost a price e'ual to a$era#e total cost. because competition oul& lo er costs for consumers9 W"! or "! not9 2ultiple operatin# s!stems oul& not be efficient because it is more efficient to "a$e a stan&ar& o$er "ic" people can s"are information. because after t"e tec"nolo#! is &e$elope& for t"e ne operatin# s!stem.imi+e social elfare% Coul& t"e #o$ernment impose t"is price on 2icrosoft9 W"at price oul& t"e #o$ernment impose if it ante& to obtain t"e lar#est possible 'uantit! at t"e lo est price for consumers9 0 0m 0ac 0so D 3so *."e best t"e #o$ernment coul& &o. "ere *. an& t"e price on t"e orl& mar(et falls% .Department of Economics. an& it is efficient to "a$e a sin#le pro&ucer of a stan&ar& operatin# s!stem% e8 *ssume 2icrosoft is a natural monopol! in t"e mar(et for operatin# s!stems% Dra a #rap" representin# t"e mar(et for Win&o s% /abel t"e 'uantit! an& price 2icrosoft oul& ant to c"ar#e to ma.

"ere t"e! ill eac" pla! t"e sta#e #ame NE of c"eat. @ 1% W"at is t"e Nas" E'uilibrium of t"is #ame if it is pla!e& onl! once9 E. CSUS Economics 1B Fall 2002 Name:____________________ Section Number:____________ Sau&i *rabia 4estrict :il Sales 10. A4estrict oil sales as lon# as bot" pla!ers "a$e al a!s restricte& oil sales in t"e past% :t"er ise c"eat fore$er%B ?% No consi&er an announcement b! -ra' t"at t"e! are #oin# to #o stop pro&ucin# oil ? !ears from no % . an& neit"er pla!er ants to be t"e last one to c"eat. 10 12. ? -ra' 4estrict :il Sales C"eat C"eat ?. so t"e! bot" c"eat in all perio&s of a finite #ame% .Department of Economics.plain "!% W"at pa!offs ill eac" countr! recei$e usin# t"is strate#!9 -ra' an& Sau&i *rabia bot" c"eat. 12 @."e tri##er strate#! un+ips."is #ame is no finite% W"at strate#! ill eac" countr! emplo! &urin# t"e last !ear9 W"!9 W"at strate#ies ill be pla!e& &urin# t"e !ear prior to t"e final !ear9 W"!9 W"at is t"e Nas" E'uilibrium of t"is finite #ame9 Bot" countries ill consi&er t"e last !ear a sta#e #ame.tra oil on t"e orl& mar(et% Describe a tri##er strate#! t"at is a Nas" E'uilibrium of t"is infinitel! repeate& #ame% ."e tri##er strate#! oul& sa!. an& assume bot" countries belie$e t"at t"e! ill be competin# fore$er% Eac" !ear eac" countr! &eci&es to eit"er restrict oil sales or c"eat b! sellin# e. because t"is is t"e best response to eit"er &ecision of t"e ot"er countr!% Eac" countr! ill recei$e pa!offs of @ usin# t"is strate#!% 2% No t"in( of t"is #ame as bein# pla!e& eac" !ear. c"eat% Because bot" pla!ers reco#ni+e t"at t"e opponent "as an incenti$e to c"eat t"e perio& before. t"e! ill bot" c"eat in t"e secon& to t"e last perio&% .