GHADSWAY’S ECO301 QUESTION BANK

Fellow student, the following questions have been carefully selected from
recommended textbooks, tutorial sets, lecture notes, recent past questions and
few sites on the web to help us prepare for our forthcoming ECO301 exams.
Questions cover majority of topics treated. Kindly spend some time to go
through and solve.

1. Mr. Ghadsway spends all his monthly income on KFC (X) and drinks (Y), his
preference can be given by the utility function, 𝑼(𝑿, 𝒀) = √𝟐𝑿𝟐 + 𝒀𝟐
a. Is the assumption “More is better than less” satisfied for both goods?
b. Find the marginal rate of substituting between KFC and drinks?
c. Suppose that the price of books and cloth are $3 and $5 respectively,
determine the optimal bundles assuming that his income is $100?
d. What is the income elasticity of demand for the two goods at the price set?
e. What is the total utility under this consumption level?
f. If the price of KFC falls by $1 in the next month, determine the new optimal
bundles that Mr. Ghadsway will consume given the same income?
g. What is the income effect, the substitution effect and the total effect after the
reduction in the price of KFC?

2.A consumer has the utility function 𝑼(𝑿, 𝒀) = √𝑿𝒀

I. Find the demand functions for X and Y
II. Let the budget be M=100. Prices are (1,1). What are the demand
quantities? What is the utility level?
III. If the price of the second good P2 rises to 2, determine the new
quantities demanded and the new level of utility.
IV. What is the income compensation necessary to put the consumer
back to his original utility level after the price change?
V. Assume the utility function is 𝑈(𝑋, 𝑌) = 𝑙𝑛𝑋 + 𝑙𝑛𝑌. How does this
new utility function change your results from part a to d of this
question?
3. A consumer’s utility for two goods A and B can be formulated as 𝑼(𝑨, 𝑩) =
𝑨𝑩. Given that the consumer has a monthly income of GHS16 which is spent
entirely on the two goods, and the prices of the goods are GHS2 and GHS4
respectively;

A. Determine the optimal choice of A and B

B. What is the marginal utility of money?
C. Find MRSA,B and MRSB,A.
D. If the price of A falls to GHS0.50, calculate

a. The new optimal choice of A and B

b. The income effect
c. The total effect
d. The compensating variation
e. The equivalent variation

4. Suppose that you are given the following production function:

Q = 250(L + 4K)

Suppose further that the price of labor (w) is GHc25 per hour and the rental price of
capital (r) is GHc100 per hour.

b) What is the optimal capital/labor ratio?

c) Suppose that the price of capital was lowered to GHc25 per hour? What is
the new optimal ratio of capital to labor?

5. Given that Prince’s multi-dollar company has a budget constraint of $108

billion, rent of capital is 3 billion and wage of labor as 4 billion and the Cobb
Douglas production function is 𝑸 = 𝑲𝟎.𝟔 𝑳𝟎.𝟓
a. Determine the return to scale of the company?
b. Find the demand function for labor and capital?
c. Find the unit of Labor and capital that the firm should employ?
d. If the price of labor falls to half the initial price, determine the output effect
and the substitution effect of the price change?
6. Consider the production function 𝑄 = LK, where the MPL=K and MPK=L.
Suppose the price of labor is w and price of capital is r. Derive an expression for
the input-demand curve.

7. A firm faces a long run production function 𝑋 = 10𝐿 0.50𝐾0.50 and inputs prices of
L is 100 and K is 200.

a) What are the firm’s cost minimizing level of employment and capital stock if it
produces 200 units of output?
b) What if the firm produces 400 units of output, what are the long run average
and marginal costs in each case?
c) Suppose that the firm becomes more efficient technically so that the production
function becomes 𝑋 =10𝐿 0.50𝐾0.50 what happens to the total, average and
marginal costs if output equal 200 and 400.
d) What happens to the capital-labor ratio if output equals 200 and the wage rate
increases by 10 per cent? What are the total and marginal costs?

8. The total cost equation for a firm producing two products is

2 2
TC (Q1, Q2) = 25 + Q1 + 4Q2 + 5Q1Q2

a. Do cost complementarities exist for this firm?

b. Under what circumstances do economies of scope exist for this firm?
c. Suppose that Q1 = Q2 = 2. Do cost complementarities exist?
d. Suppose that Q1 = Q2 = 3. Do cost complementarities exist?
e. Suppose that the firm is currently producing 5 units of Q1 and 10 units of Q2.
What is the firm’s total cost of production?
f. Suppose that the firm divests itself of the division selling Q1 to a competitor.
How much will it cost the firm to continue producing 10 units of Q2? What is
the total cost of producing both Q1 and Q2 if the firm producing Q1 produces
5 units?
9. Hale and Hearty Limited (HH) is a small distributor of B&Q Food stores, Inc.,
in the highly competitive health care products industry. The market-determined
price of a 100-tablet vial of HH’s most successful product, papaya extract, is $10.
HH’s total cost (TC) function is given as 𝑻𝑪 = 𝟏𝟎𝟎 + 𝟐𝑸 + 𝟎. 𝟎𝟏𝑸𝟐
a. What is the firm’s profit-maximizing level of output? What is the
firm’s profit at the profit-maximizing output level? Is HH in short-
run or long run competitive equilibrium? Explain.
b. At P = $10, what is HH’s break-even output level?
c. What is HH’s long-run break-even price and output level?
d. What is HH’s shutdown price and output level? Does this price–
output combination constitute a short-run or a long-run competitive
equilibrium? Explain.

10. Consider the monopolist that faces the following market demand and total cost
functions:
𝑷
𝑸 = 𝟐𝟐 −
𝟓
𝑻𝑪 = 𝟏𝟎𝟎 − 𝟏𝟎𝑸 + 𝑸𝟐
a. Find the profit-maximizing price (Pm) and output (Qm) for this firm. At this
price–quantity combination, how much is consumer surplus?
b. How much economic profit is this monopoly earning?
c. Given your answer to part a, what, if anything, can you say about the
redistribution of income from consumer to producer?
d. Suppose that government regulators required the monopolist to set the selling
price at the long-run, perfectly competitive rate. At this price, what is consumer
surplus?
e. Relative to the perfectly competitive long-run equilibrium price, what is the
deadweight loss to society at Pm?

11.A typical firm in a monopolistically competitive industry faces the following

demand and total cost equations for its product.
 𝑷
𝑸 = 𝟐𝟎 −
𝟑
𝑻𝑪 = 𝟏𝟎𝟎 − 𝟓𝑸 + 𝑸𝟐
a. What is the firm’s short-run, profit-maximizing price and output level?
b. What is the firm’s economic profit?
c. Suppose that the existence of economic profit attracts new firms into the
industry such that the new demand curve facing the typical firm in this industry
is Q = 35/3 - P/3. Assuming no change in the firm’s total cost function, find the
new profit-maximizing price and output level.
d. Is the firm earning an economic profit?
e. What, if anything, can you say about the relationship between the firm’s
demand and average cost curves? Is this result consistent with your answer to
part c?

12.Glamdring Enterprises produces a line of fine cutlery. The demand equation for
the firm’s top-of-the-line cutlery set, Orcrist is
𝑸 = 𝟏𝟎 − 𝟎. 𝟐𝑷
Glamdring’s total cost equation is;

𝑻𝒄 = 𝟓𝟎 − 𝟒𝑸 + 𝟐𝑸𝟐

a. Give the firm’s short-run profit-maximizing price and output level. Verify
that Glamdring is earning a positive economic profit. What is the
relationship between price and average total cost?
b. Suppose that the existence of economic profits calculated in part a attracts
new firms into the industry. As a result, the demand curve facing Glamdring
becomes Q = 4.38 - 0.095P. Assuming no change in the firm’s total cost
function, give the new profit-maximizing price and output level.
c. Is this firm in long-run monopolistically competitive equilibrium?
d. What, if anything, can you say about the relation between the firm’s demand
and average cost curves? Is this result consistent with your answer to part c?
13. Suppose that a firm in a monopolistically competitive industry faces the
following demand equation for its product; 𝐐 = 𝟗 − 𝟎. 𝟏𝐏
The firm’s total cost equation is 𝑻𝑪 = 𝟕𝟓 − 𝑸 + 𝟑𝑸𝟐
a. Give the firm’s short-run profit-maximizing price and output.
b. Verify that the firm is earning a positive economic profit. What is the
relationship between price and average total cost?
c. Suppose that the existence of positive economic profits attracts new firms
into the industry. As a result, the new demand curve facing the firm is 𝑸 =
𝟑. 𝟖𝟗𝟏 − 𝟎. 𝟎𝟒𝟓𝟒𝟓𝑷.
d. Is this firm in long-run monopolistically competitive equilibrium?
e. What is the relationship between selling price and average total cost? Is this
consistent with your answer to part c?
Now suppose that in the above, the demand curve for the firm’s product was
𝑸 = 𝟑 − 𝟎. 𝟎𝟒𝑷 and TC remains same.
f. Give the firm’s short-run profit-maximizing price and output.
g. Verify that the firm is earning a negative economic profit. What is the
relation between price and average total cost?
Suppose that the existence of negative economic profits causes some firms to
exit the industry. As before, the demand curve facing the firm becomes 𝑸 =
𝟑. 𝟖𝟗𝟏 − 𝟎. 𝟎𝟒𝟓𝟒𝟓𝑷.
h. What is the relation between selling price and average total cost? Is this
consistent with your answer to part f?

14. Lightning Company is a firm in an oligopolistic industry. Lightning faces a

“kinked” demand curve for its product, which is characterized by the following
equations:
𝑸𝟏 = 𝟖𝟐 − 𝟖𝑷
𝑸𝟐 = 𝟒𝟒 − 𝟑𝑷
Suppose further that the firm’s total cost equation is
𝑻𝑪 = 𝟖 + 𝑸 + 𝟎. 𝟎𝟓𝑸𝟐
a. Give the price and output level for Lightning’s product.
b. Based on your answer to part a, what is the firm’s profit?
c. Determine the range of values within which Lightning’s marginal cost may
vary without affecting the prevailing price and output level.
d. Based on your answer to part a, what is the firm’s marginal cost? Is it
consistent with your answer to part c?
e. Suppose that Lightning’s total cost equation changed to TC = 12 + 5Q + 0.1Q2.
Will the firm continue to operate at the same price and output level? If not,
what price will the firm charge and how many units will it produce?
f. Based on your answer to part e, what is the Lightning’s profit?

15.Suppose that International Dynamo is a contractor in the oligopolistic aerospace

industry. International Dynamo faces a “kinked” demand curve for its product,
which is defined by the equations:

𝑸𝟏 = 𝟐𝟎𝟎 − 𝟐𝑷
𝑸𝟐 = 𝟔𝟎 − 𝟎. 𝟒𝑷
Suppose further that International Dynamo has a constant marginal cost MC = $50.
a. Give the price and output level for International Dynamo’s product.
b. Based on your answer to part a, what is International Dynamo’s profit?
c. Determine the range of values within which marginal cost may vary without
affecting the prevailing market price and output level.
d. Diagram your answers to parts a, b, and c.

16. Thunder Corporation is an oligopolistic firm that faces a “kinked” demand

curve for its product. If Thunder charges more than the prevailing market price, the
demand curve for its product may be described by the demand equation 𝑸𝟏 =
𝟒𝟎 − 𝟐𝑷
On the other hand, if Thunder charges less than the prevailing market price, it faces
the demand curve 𝑸𝟐 = 𝟏𝟐 − 𝟎. 𝟒𝑷
a. What is the prevailing market price for Thunder’s product?
b. At the prevailing market price, what is Thunder’s total output?
c. What is Thunder’s marginal revenue function?
d. Assuming that Thunder Corporation is a profit maximizer, at the prevailing
market price what is the possible range of values for marginal cost? e. Diagram
your answers to parts a, b, and c.
17. A firm faces the following average revenue (demand) curve: P = 100 - 0.01Q
where Q is weekly production and P is price, measured in cents per unit. The firm’s
cost function is given by C = 50Q + 30,000. Assuming the firm maximizes profits,

a. What is the level of production, price, and total profit per week?
b. If the government decides to levy a tax of 10 cents per unit on this product,
what will be the new level of production, price, and profit?

18. A firm has two factories for which costs are given by:
Factory # 1: 𝑪𝟏 (𝑸𝟏 ) = 𝟏𝟎𝑸𝟐𝟏
Factory # 2: 𝑪𝟐 (𝑸𝟐 ) = 𝟐𝟎𝑸𝟐𝟐
The firm faces the following demand curve: P = 700 - 5Q where Q is total output,
i.e. Q = 𝑸𝟏 + 𝑸𝟐 .
a. On a diagram, draw the marginal cost curves for the two factories, the
average and marginal revenue curves, and the total marginal cost curve (i.e.,
the marginal cost of producing Q = 𝑄1 + 𝑄2 . Indicate the profit-maximizing
output for each factory, total output, and price.
b. Calculate the values of 𝑄1 , 𝑄2 , Q, and P that maximize profit.
c. Suppose labor costs increase in Factory 1 but not in Factory 2. How should
the firm adjust the following (i.e., raise, lower, or leave unchanged): Output
in Factory 1? Output in Factory 2? Total output? Price?

19. Dayna’s Doorstops, Inc. (DD), is a monopolist in the doorstop industry. Its cost
is C = 100 - 5Q +Q2, and demand is P = 55 - 2Q.
a. What price should DD set to maximize profit? What output does the firm
produce? How much profit and consumer surplus does DD generate?
b. What would output be if DD acted like a perfect competitor and set MC =
P? What profit and consumer surplus would then be generated?
c. What is the deadweight loss from monopoly power in part (a)?
d. Suppose the government, concerned about the high price of doorstops, sets a
maximum price at $27. How does this affect price, quantity, consumer
surplus, and DD’s profit? What is the resulting deadweight loss?
 e. Now suppose the government sets the maximum price at $23. How does this
affect price, quantity, consumer surplus, DD’s profit, and deadweight loss?
f. Finally, consider a maximum price of $12. What will this do to quantity,
consumer surplus, profit, and deadweight loss?

20. A monopolist faces the following demand curve: Q = 144/P2 where Q is the
quantity demanded and P is price. Its average variable cost is AVC = Q1/2, and its
fixed cost is 5.
a. What is its profit-maximizing price and quantity? What is the resulting profit.
b. Suppose the government regulates the price to be no greater than $4 per unit.
How much will the monopolist produce? What will its profit be?
c. Suppose the government wants to set a ceiling price that induces the
monopolist to produce the largest possible output. What price will do this?

21. A company can sell its product in two separate market defined by the
following inverse
demand functions, P1=10-𝑸𝟏 , P2=20-1.5𝑸𝟐 and the cost associated with
production is given by
𝑇𝐶 = 4 + 2Q.
a. What prices and quantities should the firm charge and produce in each
market.
b. What profit will the firm make if it practices price discrimination
c. If the firm is charging uniform price in all market what price will it
charge and what output will maximize profit
d. What is the maximum profit for charging same price?
e. Calculate the elasticity of demand in each market and comment on
your result.

22.A homogenous product duopoly faces a market demand function given by 𝑃 =

300 − 3Q
, Q = 𝑄1 + 𝑄2 .both firms have constant MC=100
a) What is firm A’s profit maximizing quantity given that firm B produces an
output of
20 and 50 units per year
b) Derive the equations of each firm’s reaction curve and graph these curves
c) What is the Cournot equilibrium quantity per firm and price in this market
d) What would the equilibrium price in the market be if the two firms colluded to
set the
monopoly price
e) What will be the equilibrium price if firms colluded to set the perfect
competition price
f) What is the Bertrand equilibrium price
g) What is the Cournot quantity and industry price when firm A’s MC=100 and
firm B’s
MC=90

23.The employment of teaching assistants (TAs) by major universities can be

characterized as a monopsony. Suppose the demand for TAs is W = 30,000 - 125n,
where W is the wage (as an annual salary) and n is the number of TAs hired. The
supply of TAs is given by W = 1000 + 75n.
a. If the university takes advantage of its monopsonist position, how many TAs
will it hire? What wage will it pay?
b. If, instead, the university faced an infinite supply of TAs at the annual wage
level of $10,000, how many TAs would it hire?

24. There are 10 households in Lake Wobegon, Minnesota, each with a demand
for electricity of Q = 50 - P. Lake Wobegon Electric’s (LWE) cost of producing
electricity is TC = 500 + Q.
a. If the regulators of LWE want to make sure that there is no deadweight loss in
this market, what price will they force LWE to charge? What will output be in
that case? Calculate consumer surplus and LWE’s profit with that price.
b. If regulators want to ensure that LWE doesn’t lose money, what is the lowest
price they can impose? Calculate output, consumer surplus, and profit. Is there
any deadweight loss?
c. Kristina knows that deadweight loss is something that this small town can do
without. She suggests that each household be required to pay a fixed amount
just to receive any electricity at all, and then a per-unit charge for electricity.
Then LWE can break even while charging the price calculated in part (a). What
fixed amount would each household have to pay for Kristina’s plan to work?
Why can you be sure that no household will choose instead to refuse the
payment and go without electricity?

25. A monopolist is deciding how to allocate output between two geographically

separated markets (East Coast and Midwest). Demand and marginal revenue for
the two markets are
P1 = 15 - Q1 MR1 = 15 - 2Q1
P2 = 25 - 2Q2 MR2 = 25 - 4Q2
The monopolist’s total cost is C = 5 + 3(Q1 + Q2).
What are price, output, profits, marginal revenues, and deadweight loss;
(i) if the monopolist can price discriminate?
(ii) if the law prohibits charging different prices in the two regions?

26. A monopolist can produce at a constant average (and marginal) cost of AC =

MC = $5. It faces a market demand curve given by Q = 53 - P.
a. Calculate the profit-maximizing price and quantity for this monopolist.
Also calculate its profits.
b. Suppose a second firm enters the market. Let Q1 be the output of the first
firm and Q2 be the output of the second. Market demand is now given by
Q1 + Q2 = 53 - P Assuming that this second firm has the same costs as
the first, write the profits of each firm as functions of Q1 and Q2.
c. Suppose (as in the Cournot model) that each firm chooses its profit-
maximizing level of output on the assumption that its competitor’s
output is fixed. Find each firm’s “reaction curve” (i.e., the rule that gives
its desired output in terms of its competitor’s output).
 d. Calculate the Cournot equilibrium (i.e., the values of Q1 and Q2 for
which each firm is doing as well as it can, given its competitor’s output).
What are the resulting market price and profits of each firm?
e. Suppose there are N firms in the industry, all with the same constant
marginal cost, MC = $5. Find the Cournot equilibrium. How much will
each firm produce, what will be the market price, and how much profit
will each firm earn? Also, show that as N becomes large, the market
price approaches the price that would prevail under perfect competition.

27. The market demand function for gelato in Summersville is Q d = 70 − P 2 Its

cost function for producing gelato is T C = 5 + 20Q.
i. What is fixed cost, the variable costs, average costs and
marginal costs of producing gelato? Does the cost function of
gelato have economies or diseconomies of scale?
ii. Suppose that there is only ONE producer of bathing suits. Find
the profit-maximizing quantity and price for bathing suits.
iii. Suppose that firm can perfectly price discriminate (first degree
price discrimination). How much will it produce? How much
will its profits be?
iv. What will be the equilibrium prices and quantities, if there are
TWO firms that choose quantities simultaneously? (Cournot
Competition).
v. Now assume that the first firm gets to choose quantity before
the entrant. What are the quantities that these firms will produce
and the price in the market (Stackelberg Competition)?
Why are these quantities different?

28. A homogeneous products duopoly faces a market demand function given by P

=300 -3Q, where Q = Q1 + Q2. Both firms have a constant marginal cost MC
=100.
a) What is Firm 1’s profit-maximizing quantity, given that Firm 2
produces an output of 50 units per year? What is Firm
1’s profit-maximizing quantity when Firm 2 produces 20 units per year?
b) Derive the equation of each firm’s reaction curve and then graph these
curves.
 c) What is the Cournot equilibrium quantity per firm and price in this
market?
d) What would the equilibrium price in this market be if it were perfectly
competitive?
e) What would the equilibrium price in this market be if the two firms
colluded to set the monopoly price.
f) What is the Bertrand equilibrium price in this market?
g) What are the Cournot equilibrium quantities and industry price when
one firm has a marginal cost of 100 but the other firm has a marginal cost
of 90?

29. Two firms, Alpha and Bravo, compete in the European chewing gum
industry. The products of the two firms are differentiated, and each month
the two firms set their prices. The demand functions facing each firm are:
𝑄A = 150 − 10PA+ 9PB and 𝑄B = 150 − 10PB + 9PA
where the subscript A denotes the firm Alpha and the subscript B denotes the
firm Bravo. Each firm has a constant marginal cost of $7 per unit.
a) Find the equation of the reaction function of each firm.
b) Find the Bertrand equilibrium price of each firm.
c) Sketch how each firm’s reaction function is affected by each of the
following changes:
i) Alpha’s marginal cost goes down (with Bravo’s marginal cost
remaining the same).
ii) Alpha and Bravo’s marginal cost goes down by the same
amount.
iii) Demand conditions change so that the “150” term in the
demand function now becomes larger than 150. iv) The “10”
and “9” terms in each demand function now become larger (e.g.,
they become “50” and “49,” respectively).
d) Explain in words how the Bertrand equilibrium price of each firm is
affected by each of the following changes:
i. Alpha’s marginal cost goes down (with Bravo’s marginal
cost remaining the same).
ii. Alpha and Bravo’s marginal cost goes down by the same
amount.
iii. Demand conditions change so that the “150” term in the
demand function for each firm now becomes larger than
150.
 iv. The “10” and “9” terms in each demand function now
become larger (e.g., they become “50” and “49,”
respectively).

30. Ghana wants to privatize its firm’s industry and therefore allow 10000 farmers
to produce rice under circumstances. Assume that entry into the rice market is free,
also assume that each farmer has a total cost of TC = q 2 /2 -4q+200 where q is the
firms output at the moment government planners are setting the price at Gh¢2 per
every bag of rice
a. Find the short run output of the firm?
b. Find the total profit in the short run?
c. Find the long run output of the firm?
d. Find the total profit in the long run?

31. Suppose that the market demand curve in a global industry is given by;

Qd = 110 - 10P,

where Qd is measured in millions of units of product per year and P is measured in

dollars per unit.

The industry is dominated by a large firm with a constant marginal cost of $5 per
unit. There also exists a competitive fringe of 200 firms, each of whom has a
marginal cost given by

MC = 5 + 100q,

where q is the output of a typical fringe firm.

Use the above information to answer the following questions:

a) What is the equation of the supply curve for the competitive fringe?
b) What is the equation of the dominant firm’s residual demand curve?
c) What is the profit-maximizing quantity of the dominant firm?
d) What is the resulting market price?
 e) At this price, how much does the competitive fringe produce?
f) What is the fringe’s market share?
g) What is the dominant firm’s market share?

32. A firm operates two plants whose marginal cost schedules are:
MC1 = 2 + 0.2q1 MC2= 6 + 0.04q2
It is a monopoly seller in a market where the demand schedule is p = 66 − 0.1q
where q is aggregate output and all costs and prices are measured in £.
How much should the firm produce in each plant, and at what price should total
output be sold, if it wishes to maximize profits?

33. A firm operates four plants whose marginal cost schedules are:
MC1 = 20 + q1 MC3 = 40 + q3
MC2 = 40 + 0.5q2 MC4 = 60 + 0.5q4
and it is a monopoly seller in a market where p = 580 − 0.3q How much should it
produce in each plant and at what price should its output be sold if it wishes to
maximize profit?

34. A multiplant monopoly operates two plants whose marginal cost schedules are:
MC1 = 42.5 + 0.5q1 MC2 = 130 + 2q2
It also sells its product in two separable markets whose demand schedules are
PA = 360 – qA PB = 280 − 0.4qB (Note that the subscripts A and B are used to
distinguish quantities sold in the two markets from the quantities q1 and q2
produced in the two plants.)
Calculate how much it should produce in each plant, how much it should sell in
each market, and how much it should charge in each market.
35. A. Suppose that a firm’s Total Production functions is 𝒒 = 𝟐√𝒂. Let the price
of the product be P = 60 and the factor hire price be Wa = 4
(a) Find the VMPa curve and the optimal factor employment, a.
(b) What is the associated output, q?
(c) What is the firm’s demand curve for factor 4?

B. Using the same total product function; 𝒒 = 𝟐√𝒂. Assume now that the firm has
monopoly power and that it faces a downward-sloping demand curve of the form
𝒑 = 𝟗𝟎 − 𝒒. Let the hire price be Wa = 4
a. Find the VMPa and MRPa functions and verify that MRPa lies below VMPa.
b. What is the optimal factor employment a and the associated output q?
c. What is the monopolist price, output and employment level with those of the
price-taker?

36. The indirect demand function for an industry is given by 𝑷 = 𝟏𝟎𝟎𝟎 − (𝑸𝟏 +
𝑸𝟐 ). The cost function of the firm is given by 𝑪𝟏 (𝑸𝟏 ) = 𝟏𝟎𝟎𝑸𝒊 where i=1 or 2
respectively. Compute for the industry the output, price and profit for;
a. Cournot
b. Stalkelberg
c. Bertrand
d. Collusion (cartel)

37. Two firms compete by choosing price. Their demand functions are Q1 =20 – P1
+ P2 and Q2 =20 + P1 - P2. Note that the demand for each good depends only on the
difference in prices; if the two firms collude and set the same price, they would
make that price as high as they wanted, and earn infinity profit.
MC = 0
a. Suppose the two firms set same price, find the Cournot equilibrium price and
quantity. What will its profit be? (maximize profit w.r.t prices)
b. Suppose firm 1 sets its price first followed by firm 2. What price will each
firm charge, how much will it sell and what will its profit be?
c. Suppose you are one of these firms and that there are three ways of playing
the game: (1). both firms set price at the same price; (2) you set price first; or
 (3). Your competitor sets price first. If you are to choose among these
options, which would you prefer?

38. Consider two firms facing the demand curves facing Pi = 50-5 Qi where
Q=Q1+Q2. The firms’ cost functions are: 𝑪𝟏 (𝑸𝟏 ) = 𝟐𝟎 + 𝟏𝟎𝑸𝟏 and 𝑪𝟏 (𝑸𝟐 ) =
𝟏𝟎 + 𝟏𝟐𝑸𝟐
a. Suppose both firms have entered the industry. What is the joint profit-
maximizing level of output? How much will each produce? How would your
answer change if the firms have not yet entered the industry?
b. What is each firm equilibrium output and profit if they behave
noncooperatively? Use the Cournot model. Draw their reaction functions
and show the equilibrium.
c. How much should firm 1 be willing to pay to purchase firm 2 if collusion is
illegal but a takeover is not?

39.Suppose that a monopsonist’s only input is labor and its production function is
Q = 5L, where L is the quantity of labor (expressed in thousands of hours per
week). Suppose, too, that the monopsonist can sell all the output it wants at a
market price of $10 per unit and that the supply curve it faces for labor is w =2 +
2L.
40.Suppose there is a perfectly competitive industry with a market demand
expressed as 𝑷 = 𝟏𝟎𝟎 − (𝟏/𝟏𝟎)𝑸. Furthermore, suppose also that all firms in the
industry are identical and that a representative firm’s total cost and marginal cost
are;
𝑻𝑪 = 𝟏𝟎𝟎 + 𝟓𝒒 + 𝒒𝟐
𝑴𝑪 = 𝟓 + 𝟐𝒒
a. What is the ATC for the representative firm?
b. In the long run, how many units will this firm produce and what price shall
be charged?
c. What is the total market quantity produced in this market in the long run?
d. How many firms are in the industry in the long run?
e. How do short run profits change for the firm if demand decreases?
Increases?
f. How do long run profits change for the firm if demand increases?
Decreases?

MAY WE ALL EXCEL….