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Question 1 (15 points): You have a max of 2 pages and 1/2 to answer all the questions

Economics

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Question 1 (15 points): You have a max of 2 pages and 1/2 to answer all the questions. You may

draw your graphs by hand.

In some highly concentrated industries, a single ("dominant") firm serves a majority of the market and a

group of smaller ("fringe") firms supply the rest.

a) (5 points) Explain what is the difference between a monopoly and a dominant firm.

b) (10 points) Assume that total market demand for the oil market is given by:

QD = 200 - 2P. Assume further that the non-OPEC oil producers act as a competitive fringe with a

supply given by QS = ½P -12.5. The dominant firm marginal cost is given by MC = 10 + ½Q.

Use the dominant firm model discussed in the recorded lecture to answer the following questions.

1. What is the minimum price needed for the competitive fringe to supply positive units of Output?

2. At what price does the competitive fringe supply output to the entire market?

3. Derive the dominant firms residual demand function. Show all the steps.

4. Derive the dominant firm's marginal revenue function. Show all the steps.

5. Show that the equilibrium price set by the dominant firm is P =$61.92 and the total market demand

is Q = 76.16.

6. At the equilibrium price set by the dominant firm, how much will the competitive fringe supply to the

market? Show it is Q = 18.46.

7. At the equilibrium price set by the dominant firm, how much will the dominant fifirm supply to the

market? Explain.

8. Show the above answers graphically.

9 The competitive fringe reduces the market power of the dominant firm

If the dominant firm wanted to try and eliminate the competitive fringe, how might the dominant accomplish this? Explain.

10. If the dominant fifirm eliminates the competitive fringe, explain how this will the market and the

consumers.Explain.

Question 2 (20 points): Please fully explain your answer and clearly state if the statements are true or

false. Points are awarded based on explanations.

1.(4 points) In a two-player game, a Nash equilibrium is the outcome that maximizes the sum of the

players’ payoffffs. (you have one paragraph)

2.(4 points) In a Nash equilibrium in a two-player game, both players must have selected a dominant

strategy. (you have one paragraph)

3.(4 points) Repeatedly playing the Prisoner’s Dilemma may or may not result in a cooperative solution.

(you have one paragraph)

4.(4 points) In the models of oligopoly considered in the recorded lectures, the equilibrium price will be

strictly lower if there are n + 1 fifirms than if there are n fifirms. (you have one paragraph)

5.(4 points) In the models of oligopoly considered in the recorded lectures, consumers are no better offff

than in a perfectly competitive market. (you have one paragraph)