09#20#2012&#&AHW& 1&

ECON%471%–%Fall%2012%–%Assignment%1%%Due%October%2,%2012%(In%Class)%%While&working&with&your&classmates&may&be&beneficial&and&is&encouraged,&I&take&a&very&dim&view&of&identical&assignments.&&You&should&assume&that&a&person&reviewing&your&answers&has&no&previous&knowledge&of&economics.&&As&such,&your&answers&must&be&coherent,&intelligible&and&comprehensive.&&All&graphs&should&be&graphed&to&scale,&clearly&labelled&and&easy&to&understand.&&Please&consult&your&course&notes&and&the&text&prior&to&attempting&any&given&question.&%%Question%1%(Short%Answer)%%Answer&the&following&questions&making&use&of&whatever&tools&(diagrams,&etc.)&you&feel&are&appropriate.&Please&limit&your&responses&to&one&page&per&short&answer.&%

a) Explain&why&a&“monopolist”&defined&as&“the&only&supplier&of&a&product”&may&not&be&(necessarily)&able&to&exert&market&power.&

b) What&is&the&difference&between&monopoly&rents&and&Ricardian&rents?&c) Explain&the&factors&that&determine&the&extent&to&which&a&firm&engaged&in&

Cournot&competition&may&be&able&to&exert&market&power.&d) Use&a&diagram&to&evaluate&the&following&statement:&“…&no&merger&to&

monopoly&could&ever,&by&definition,&bring&about&gains&in&efficiency&that&offset&the&effects&of&the&merger&on&competition.”&

%%Question%2%%The&(inverse)&demand&curve&for&a&market&is&given&by:&&! ! = ! − !&There&are&two&firms&(!, !)&present&in&this&market,&such&that:&&! = !! + !!&Each&firm&!&(where&! = !, !)&has&a&cost&function&represented&by:&! !! = !!! + !! &&

a) If&each&firm&competes&over&quantities&in&this&market,&find&the&equilibrium&quantities&for&each&firm.&

b) Find&the&equilibrium&profits&for&each&firm.&c) Suppose&that&firms&collude&in&this&market&(evenly&splitting&output).&Find&

the&collusive&outputs&and&profits&for&each&firm.&d) Again,&suppose&the&firms&collude&and&evenly&split&output.&What&is&the&

marginal&cost&and&marginal&revenue&for&each&firm?&&What&do&these&values&suggest&about&the&stability&of&the&collusive&agreement?&

e) If&firm&!&is&certain&that&firm&!&will&honour&the&collusive&agreement,&what&level&of&output&will&firm&!&choose?&What&are&the&resulting&profits&for&firm&!&and&!&under&this&scenario?&

09#20#2012&#&AHW& 2&

&Question%3&&The&(inverse)&demand&curve&for&a&market&is&given&by:&&! ! = ! − !&There&are&three&firms&engaged&in&quantity&competition&present&in&this&market.&Each&has&a&cost&function&represented&by:&&! !! = !!!! &&

a) Solve&for&the&three&best&response&functions&in&terms&of&the&other&firms’&output.&For&instance&solve&for&!! = !!(!!, !!)&etc.&

b) Solve&for&the&Cournot&equilibrium&quantities&(e.g.&!!∗, !!∗ , !!∗&in&terms&of&the&parameters).&

c) Suppose&that&!! = 2, !! = 3, !! = 4.&Evaluate&the&Cournot&equilibrium&quantities&and&find&the&equilibrium&profits&for&each&firm.&

d) Suppose&that&firm&2&merges&with&firm&3&and&that&entry&by&other&firms&is&prohibited&in&this&market.&The&new&merged&firm,&denoted&!,&is&able&to&produce&its&entire&output&using&firm&2’s&technology&(and&is&therefore&subject&to&firm&2’s&cost&function).&What&are&the&new&output&quantities&and&profits&for&the&merged&firm&and&for&firm&1?&

e) Are&consumers&made&better&off&by&this&merger?&Explain.&&

&Question%4&&Consider&the&following&game:&&&&&&&%%

a) Find&the&pure&strategy&Nash&equilibria&for&this&game.&b) What&is&the&set&of&rationalizable&strategies&for&this&game?&c) What&is&the&“most&likely”&equilibrium&for&this&game?&Explain.&

&%% %

7,7& 1,8& 2,6& 7,7&6,1& 2,3& 4,4& 0,3&8,2& 0,0& 3,3& 1,5&7,4& 5,5& 3,2& 4,3&

&&&&A&&&&&&&&&&&&&B&&&&&&&&&&&&C&&&&&&&&&&&&&&D&a&b&c&d&

09#20#2012&#&AHW& 3&

Question%5&&Consider&the&following&information&about&wireless&subscriber&market&&shares&for&Alberta,&Quebec&and&Saskatchewan&for&20111&&Province%

Bell%Group%

Telus% Rogers%New%

Entrants%SaskTel%

Alberta% 22%& 49%& 26%& 2%& 0%&Quebec% 34%& 28%& 31%& 7%& 0%&

Saskatchewan% 8%& 8%& 13%& 0%& 72%&&&a)&Calculate&the&!!"&and&!"!&for&each&province&(for&these&calculations,&assume&the&share&for&“New&Entrants”&represents&a&single&firm).&&b)&Which&province&has&the&most&highly&concentrated&wireless&market?&&Explain.&&&&&&&&&&&&&&&&&&&&&&&

&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&1&Selected&values&drawn&from&“Table&5.5.5&–&Wireless&subscriber&market&share,&by&province&(2011)”&&CRTC&–&Communications&Monitoring&Report&2012&http://www.crtc.gc.ca/eng/publications/reports/policymonitoring/2012/cmr2012.pdf& &