economics 103 3

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Question 1. Suppose you are working as a consultant for a firm that is a monopoly and is worried about its policies in the short run. What would you recommend in terms of quantity changes (raise, cut, shut down or stay put) and price changes (raise, cut, stay put) in each of the following situations a through c:

a.[5 points] P = $299 MC = $349 AVC = $249

b.[5 points] MR = $150 MC = $100 AVC = $140

c.[5 points] P = $288 MC = $288 AVC = $287

[Note: P = price; MR = marginal revenue; AVC = average variable cost; MC = marginal cost]

Question 2. Libertyville has two optometrists, Dr. Smith (S) and Dr. Jones (S). Each optometrist can choose to advertise his service or not. The net revenue to each optometrist, in thousands of dollars, is listed on the payoff matrix below. Answer questions a through c:

a.[5 points] Does Dr. Smith have a dominant strategy?

b.[5 points] Does Dr. Jones have a dominant strategy?

c.[5 points] Does a Nash equilibrium exist for this game?

Dr. Smith (S)


Don’t advertise

Dr. Jones (J)


Advertise advertise

J: $185 S: $175

J: $186 S: $215

J: $225 S: $165

J: $205 S: $195

Question 3. [10 points] Suppose Wilwaukee Telecom offers its users the option of paying either (a) $2.00 per minute for telephone service or (b) a $225 flat charge for a year of unlimited toll-free calls. Consider a customer with an annual demand for telephone service of P = 11 – 0.1Q, where P is the price per minute and Q is the number of minutes of calls made per year. Calculate the consumer surplus for each of the plans (a) and (b).

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