# Micro economics

1. Consider a market with a Demand Curve that has the equation P = 14 — Q. Firms in this market can only produce goods in whole numbers from 0 to 14. In each of the following parts, the firms have a constant marginal cost of 2 per unit and no fixed costs. a. Suppose there are a large number of firms with easy entry and exit to this market. What would you expect the equilibrium Price and Quantity to be? Draw a graph showing the demand and supply curves and the equilibrium price and output. (Makesthis clear and to scale as you will be usingthis later as well). b. Suppose that there is only one firm operating in the market which cannot discriminate on prices. Plot its profits at each level of output (a graph of profits and quantity) and state what the optimal output is. On the graph in part a. highlight this output and price. c. Suppose the monopolist could now price discriminate. Repeat part b. underthis condition. d. Suppose now there are two firms competing with each other in terms if quantity (Cournot model). Draw their payoff matrix and state the Nash equilibria if they cannot cooperate. Mark this total price and output on the graph from part a. e. Now suppose the two firms in part c. were able to act as a cartel. Find the optimal output for each firm. Highlight this outcome in the payoff matrix and mark the output and price on the graph from part a. f. Suppose now that the two firms are competing on prices ratherthan on quantity. The firm with the lower price gets the entire market share, and the market share is split evenly if both have the same price. Draw the payoff matrix and state the Nash Equilibrium in such a situation. Highlight this outcome on the graph from part a. g. Rank each of these situations in terms of Consumer Surplus and overall Welfare. (Two sets of rankings). 