Nanyang Technological University

HE5091 Principles of Economics

July Semester 2022
Tutorial 4 (Student Version)

Question 1

Consider an economy in which corn is a staple food consumed by all

consumers. The market demand for corn is given by P = 100 – 2Q and the
market supply of corn is given by P = 20 + 3Q, where P is price and Q is
quantity. If the corn market is monopolized and the monopolist has a fixed
cost of $50, compute the consumer surplus, the producer surplus and the profit
or loss under the monopolist.

Question 2

Dr Tan is the only medical doctor in a small city providing medical service.
He is willing to treat up to 7 patients per day and his time and effort costs of
treating each patient is a constant amount of $60. The fixed cost of his clinic
is $80 per day. The reservation prices for his 7 potential patients are shown in
the table below:

Patient 1 2 3 4 5 6 7
Reservation Price $160 $140 $120 $100 $80 $60 $40

(a) If Dr Tan behaves like a single pricing monopolist, how many patients
should he treat and what is his profit? What is the economic surplus?

(b) What is the social optimal number of patients and the corresponding
economic surplus? What is his profit at this number of patients?

(c) If Dr Tan knows the reservation price of all the patients, how many
patients should he treat and what is his profit? What is the economic surplus?

Question 3

Uber and Grab are the only two private hire car companies in a small city.
They agree to collude by standardizing the hiring price and share the private
hire car market equally. If neither firm cheats on the agreement, each can
make $20 million profit. If either firm cheats, the party that cheats can make a
profit of $30 million, while the complier incur a loss of $10 million. If both
cheat, each can make $4 million profit. Construct a payoff matrix for this
game. Solve for the equilibrium and explain whether this game is a prisoner’s
dilemma game.

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Question 4

Honda and Toyota are two car companies that are contemplating to invest in
big sum of money to enter the driverless car market. If Honda enters the
market but Toyota does not, then Honda earns $20 million profit and Toyota
earns $0. Similarly, if Toyota enters the market but Honda does not, then
Toyota earns $20 million profit and Honda earns $0. If both enter the market,
then each suffers $10 million loss. If neither enters, each earns $0.

(a) Construct the payoff matrix for Honda and Toyota indicating the
strategies they may choose. Solve for the Nash equilibrium for the game and
explain whether the dame is a prisoner’s dilemma game.

(b) How would your answer to (a) change if the game become a sequential
game where Honda gets to move first? Explain with a tree diagram.