Subject: Economics    / General Economics    

Question

1.

Answer the following questions based on the following information. Suppose that Media Cable is a single-price monopolist in the market for cable in Anywhere, Iowa. Media has five potential customers: Morgan, Larry, Clyda, Janet, and Tom.

Each of these customers are willing to purchase cable service, but only if the price is just equal to, or lower than, his or her willingness to pay. Morgan’s willingness to pay is $130; Larry’s, $100; Clyda’s, $80; Janet’s, $40; and Tom’s, $0.

Media Cable’s marginal cost per cable package is $40. The accompanying table shows Media Cable’s demand schedule: Total Revenue and Marginal Revenue at each price level.

Price of

Cable Service Qty of Cable

Service demanded Total Revenue Marginal Revenue

$160 0 0 –

130 1 $130 $130

100 2 $200 $70

80 3 $240 $40

40 4 $160 – $80

0 5 0 – $160

Why does a monopolist face a downward sloping demand curve? (Points : 8)

More people are going to want to pay the minimum price offered. If they are offering free cable then many people will want to take advantage of that.

More people are willing to pay for cable as the price of cable service decreases.

Because the price Media Cable expects to receive for its output will not remain constant as output increases.

Fewer people are willing to pay a higher price. More people are willing to pay a lower price but Media Cable is less willing to provide the service at the lower price.

Media Cable is the only producer of cable in this market, so its demand curve is the market demand curve for the entire industry.

Question 2. 2.

Answer the following questions based on the following information. Suppose that Media Cable is a single-price monopolist in the market for cable in Anywhere, Iowa. Media has five potential customers: Morgan, Larry, Clyda, Janet, and Tom.

Each of these customers are willing to purchase cable service, but only if the price is just equal to, or lower than, his or her willingness to pay. Morgan’s willingness to pay is $130; Larry’s, $100; Clyda’s, $80; Janet’s, $40; and Tom’s, $0.

Media Cable’s marginal cost per cable package is $40. The accompanying table shows Media Cable’s demand schedule: Total Revenue and Marginal Revenue at each price level.

Price of

Cable Service Qty of Cable

Service demanded Total Revenue Marginal Revenue

$160 0 0 –

130 1 $130 $130

100 2 $200 $70

80 3 $240 $40

40 4 $160 – $80

0 5 0 – $160

Why is the marginal revenue from an additional sale less than the price of the service? (Points : 8)

Lowering the price means that Media Cable lowers the price on all cable packages sold, and that lowers its total revenue.

Marginal revenue is calculated by finding the change in total revenue or the change in quantity.

The higher the quantity the lower the sale price.

When the average falls, the marginal revenue also falls.

It costs less to provide a service in bulk.

Question 3. 3.

Answer the following questions based on the following information. Suppose that Media Cable is a single-price monopolist in the market for cable in Anywhere, Iowa. Media has five potential customers: Morgan, Larry, Clyda, Janet, and Tom.

Each of these customers are willing to purchase cable service, but only if the price is just equal to, or lower than, his or her willingness to pay. Morgan’s willingness to pay is $130; Larry’s, $100; Clyda’s, $80; Janet’s, $40; and Tom’s, $0.

Media Cable’s marginal cost per cable package is $40. The accompanying table shows Media Cable’s demand schedule: Total Revenue and Marginal Revenue at each price level.

Price of

Cable Service Qty of Cable

Service demanded Total Revenue Marginal Revenue

$160 0 0 –

130 1 $130 $130

100 2 $200 $70

80 3 $240 $40

40 4 $160 – $80

0 5 0 – $160

Suppose Media Cable currently charges $80 for its service. If it lowered the price to $40, how large is the price effect? (Points : 8)

$200

$160

$120

$70

$40

Question 4. 4.

Answer the following questions based on the following information. Suppose that Media Cable is a single-price monopolist in the market for cable in Anywhere, Iowa. Media has five potential customers: Morgan, Larry, Clyda, Janet, and Tom.

Each of these customers are willing to purchase cable service, but only if the price is just equal to, or lower than, his or her willingness to pay. Morgan’s willingness to pay is $130; Larry’s, $100; Clyda’s, $80; Janet’s, $40; and Tom’s, $0.

Media Cable’s marginal cost per cable package is $40. The accompanying table shows Media Cable’s demand schedule: Total Revenue and Marginal Revenue at each price level.

Price of

Cable Service Qty of Cable

Service demanded Total Revenue Marginal Revenue

$160 0 0 –

130 1 $130 $130

100 2 $200 $70

80 3 $240 $40

40 4 $160 – $80

0 5 0 – $160

Suppose Media Cable currently charges $80 for its service. If it lowered the price to $40, how large is the quantity effect? (Points : 8)

$200

$160

$120

$70

$40

Question 5. 5.

Answer the following questions based on the following information. Suppose that Media Cable is a single-price monopolist in the market for cable in Anywhere, Iowa. Media has five potential customers: Morgan, Larry, Clyda, Janet, and Tom.

Each of these customers are willing to purchase cable service, but only if the price is just equal to, or lower than, his or her willingness to pay. Morgan’s willingness to pay is $130; Larry’s, $100; Clyda’s, $80; Janet’s, $40; and Tom’s, $0.

Media Cable’s marginal cost per cable package is $40. The accompanying table shows Media Cable’s demand schedule: Total Revenue and Marginal Revenue at each price level.

Price of

Cable Service Qty of Cable

Service demanded Total Revenue Marginal Revenue

$160 0 0 –

130 1 $130 $130

100 2 $200 $70

80 3 $240 $40

40 4 $160 – $80

0 5 0 – $160

What is the profit maximizing quantity and price for Media Cable? (Points : 8)

1 at $130

2 at $100

3 at $80

4 at $40

5 at $0

Question 6. 6. Dr. Fine and Dr. Feelgood are the only two medical doctors offering immediate walk-in medical services in the town of Springfield. That is, they operate in a duopoly. Each doctor can charge either a high price or a low price for a standard medical visit. The accompanying matrix shows their payoffs, in profits per patient (in dollars), for any choice that the two doctors can make and tables a. through d. show two periods of various pricing choices. Some tables may be suitable answers for more than one outcome.

Table a.

FIRST Period Payoffs SECOND Period Payoffs TOTAL Payoffs

Charges

(high or low) Charges

(high or low)

Fine Low 35 Fine Low 35 70

Feelgood Low 35 Feelgood Low 35 70

Table b.

FIRST Period Payoffs SECOND Period Payoffs TOTAL Payoffs

Charges

(high or low) Charges

(high or low)

Fine Low 45 Fine Low 35 80

Feelgood High 0 Feelgood Low 35 35

Table c.

FIRST Period Payoffs SECOND Period Payoffs TOTAL Payoffs

Charges

(high or low) Charges

(high or low)

Fine High 0 Fine Low 35 35

Feelgood Low 45 Feelgood Low 35 80

Table d.

FIRST Period Payoffs SECOND Period Payoffs TOTAL Payoffs

Charges

(high or low) Charges

(high or low)

Fine High 38 Fine High 38 76

Feelgood High 38 Feelgood High 38 76

Which table above correctly portrays the outcomes, if Dr. Fine plays tit-for-tat and Dr. Feelgood cheats? (Points : 8)

Table a

Table b

Table c

Table d

Question 7. 7. Dr. Fine and Dr. Feelgood are the only two medical doctors offering immediate walk-in medical services in the town of Springfield. That is, they operate in a duopoly. Each doctor can charge either a high price or a low price for a standard medical visit. The accompanying matrix shows their payoffs, in profits per patient (in dollars), for any choice that the two doctors can make and tables a. through d. show two periods of various pricing choices. Some tables may be suitable answers for more than one outcome.

Table a.

FIRST Period Payoffs SECOND Period Payoffs TOTAL Payoffs

Charges

(high or low) Charges

(high or low)

Fine Low 35 Fine Low 35 70

Feelgood Low 35 Feelgood Low 35 70

Table b.

FIRST Period Payoffs SECOND Period Payoffs TOTAL Payoffs

Charges

(high or low) Charges

(high or low)

Fine Low 45 Fine Low 35 80

Feelgood High 0 Feelgood Low 35 35

Table c.

FIRST Period Payoffs SECOND Period Payoffs TOTAL Payoffs

Charges

(high or low) Charges

(high or low)

Fine High 0 Fine Low 35 35

Feelgood Low 45 Feelgood Low 35 80

Table d.

FIRST Period Payoffs SECOND Period Payoffs TOTAL Payoffs

Charges

(high or low) Charges

(high or low)

Fine High 38 Fine High 38 76

Feelgood High 38 Feelgood High 38 76

Which table above correctly portrays the outcomes, if Dr. Feelgood plays tit-for-tat and Dr. Fine cheats? (Points : 8)

Table a

Table b

Table c

Table d

Question 8. 8. Dr. Fine and Dr. Feelgood are the only two medical doctors offering immediate walk-in medical services in the town of Springfield. That is, they operate in a duopoly. Each doctor can charge either a high price or a low price for a standard medical visit. The accompanying matrix shows their payoffs, in profits per patient (in dollars), for any choice that the two doctors can make and tables a. through d. show two periods of various pricing choices. Some tables may be suitable answers for more than one outcome.

Table a.

FIRST Period Payoffs SECOND Period Payoffs TOTAL Payoffs

Charges

(high or low) Charges

(high or low)

Fine Low 35 Fine Low 35 70

Feelgood Low 35 Feelgood Low 35 70

Table b.

FIRST Period Payoffs SECOND Period Payoffs TOTAL Payoffs

Charges

(high or low) Charges

(high or low)

Fine Low 45 Fine Low 35 80

Feelgood High 0 Feelgood Low 35 35

Table c.

FIRST Period Payoffs SECOND Period Payoffs TOTAL Payoffs

Charges

(high or low) Charges

(high or low)

Fine High 0 Fine Low 35 35

Feelgood Low 45 Feelgood Low 35 80

Table d.

FIRST Period Payoffs SECOND Period Payoffs TOTAL Payoffs

Charges

(high or low) Charges

(high or low)

Fine High 38 Fine High 38 76

Feelgood High 38 Feelgood High 38 76

Which table above correctly portrays the outcomes, if both doctors always cheat? (Points : 8)

Table a

Table b

Table c

Table d

Question 9. 9. Dr. Fine and Dr. Feelgood are the only two medical doctors offering immediate walk-in medical services in the town of Springfield. That is, they operate in a duopoly. Each doctor can charge either a high price or a low price for a standard medical visit. The accompanying matrix shows their payoffs, in profits per patient (in dollars), for any choice that the two doctors can make and tables a. through d. show two periods of various pricing choices. Some tables may be suitable answers for more than one outcome.

Table a.

FIRST Period Payoffs SECOND Period Payoffs TOTAL Payoffs

Charges

(high or low) Charges

(high or low)

Fine Low 35 Fine Low 35 70

Feelgood Low 35 Feelgood Low 35 70

Table b.

FIRST Period Payoffs SECOND Period Payoffs TOTAL Payoffs

Charges

(high or low) Charges

(high or low)

Fine Low 45 Fine Low 35 80

Feelgood High 0 Feelgood Low 35 35

Table c.

FIRST Period Payoffs SECOND Period Payoffs TOTAL Payoffs

Charges

(high or low) Charges

(high or low)

Fine High 0 Fine Low 35 35

Feelgood Low 45 Feelgood Low 35 80

Table d.

FIRST Period Payoffs SECOND Period Payoffs TOTAL Payoffs

Charges

(high or low) Charges

(high or low)

Fine High 38 Fine High 38 76

Feelgood High 38 Feelgood High 38 76

Which table above correctly portrays the outcomes, if Dr. Fine plays tit-for-tat and Dr. Feelgood plays tit-for-tat? (Points : 8)

Table a

Table b

Table c

Table d

Question 10. 10. Dr. Fine and Dr. Feelgood are the only two medical doctors offering immediate walk-in medical services in the town of Springfield. That is, they operate in a duopoly. Each doctor can charge either a high price or a low price for a standard medical visit. The accompanying matrix shows their payoffs, in profits per patient (in dollars), for any choice that the two doctors can make and tables a. through d. show two periods of various pricing choices. Some tables may be suitable answers for more than one outcome.

Table a.

FIRST Period Payoffs SECOND Period Payoffs TOTAL Payoffs

Charges

(high or low) Charges

(high or low)

Fine Low 35 Fine Low 35 70

Feelgood Low 35 Feelgood Low 35 70

Table b.

FIRST Period Payoffs SECOND Period Payoffs TOTAL Payoffs

Charges

(high or low) Charges

(high or low)

Fine Low 45 Fine Low 35 80

Feelgood High 0 Feelgood Low 35 35

Table c.

FIRST Period Payoffs SECOND Period Payoffs TOTAL Payoffs

Charges

(high or low) Charges

(high or low)

Fine High 0 Fine Low 35 35

Feelgood Low 45 Feelgood Low 35 80

Table d.

FIRST Period Payoffs SECOND Period Payoffs TOTAL Payoffs

Charges

(high or low) Charges

(high or low)

Fine High 38 Fine High 38 76

Feelgood High 38 Feelgood High 38 76

Suppose the two doctors play a one-shot game – that is, they interact only once and never again. What will be the Nash (non-cooperative) equilibrium pricing strategy in this one-shot game? (Points : 8)

Dr. Feelgood to charge the low price and Dr. Fine to charge the high price

Both to charge the high price

Both to charge the low price

Dr. Feelgood to charge the high price and Dr. Fine to charge the low price