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Economics

1. can you think of any good real-world examples of 'game theory' type interactions? (It does not have to be in just the realm of economics.)

2.A monopolist can produce at a constant average (and marginal) cost of TC(Q)= 5Q, such that AC = MC = 5. The firm faces a market demand curve given by Q = 53 - P, where Q is produced quantity and P is the market price per unit.

  1. Calculate the Lerner index of monopoly power.

Suppose this firm generates a pollutant that is industry-specific (or a local pollutant) and proportional to output (δ is the emission coefficient) and the firm does not have any further abatement technologies. Thus regulation refers to this single firm only and does not affect other industries. A real situation represented by such a model is a chemical or pharmaceutical firm specializing in the production of a certain output and generating either a specific or a local pollutant.

 

b. Suppose δ = 2 such that each unit of the product leads to 2 unit of emission, i.e. Q = 2e. Suppose the firm is subject to an emission tax, t(e)= 8 e. Write down the firm’s total cost function when taxes are included. Calculate the profit-maximising quantity for the monopolist.

c. What is the effect on quantity? In terms of welfare, what market imperfections do the policymaker need to balance?

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