UP School of Economics

Economics 100.2
Problem Set 4: Monopolistic competition, game theory, oligopoly
Deadline: November 12, 2015
M.J.V. Abrenica

R. Bustamante/R. Guzman/M. Timbang

Directions: Write your answers on yellow pad. Show complete solutions and box your final answers.
1. Kelloggs sells Frosted Flakes cereal in a monopolistically competitive market. It faces a market
demand function given by

where P = price of a unit of Frosted Flakes and Q = units of

output. Kelloggs total cost structure is given by

a) Solve for the long run equilibrium price and output.

b) Solve for the excess capacity in the market.
2. Pizza Hut and Shakeys Pizza are a duopoly in the market for pizzas. Suppose Pizza Hut (P) and
Shakeys (S) face a market demand function given by
, where
.
Both firms face total cost structure
,
Assume the two firms are
symmetric, i.e. both firms are identical and produce the same level of output.
a) Solve for Pizza Huts profit maximizing output, given that Shakeys Pizza produces 50 pizzas.
b) Find each firms reaction function and solve for the symmetric Cournot equilibrium output of
each firm and the corresponding price in the market.
c) Suppose Pizza Hut and Shakeys Pizza collude and decide to fix prices. Solve for the new
equilibrium quantity and price.
d) Solve for the Bertrand equilibrium price in the market. Compare this with your answer in (b) and
(c) in terms of consumer welfare.
3. Suppose the demand for shawarma is given by

, where Q is units of shawarma at

market price P. At its current market structure, the market consists of three restaurants Shawarma
Snack Center (S), Uncle Moes (M), and Bricks and Copper (B). All three firms face a total cost
structure of
. Assume all three firms are symmetric.
a) Find each firms reaction function and solve for the symmetric Cournot equilibrium output of
each firm and the corresponding price in the market.
b) Suppose Uncle Moes (M) and Bricks and Copper (B) decide to merge into a single restaurant
called Halal Guys (H). Halal Guys (H) now faces a total cost structure of TC(Q) = 20Q.
i) Find the reaction function of the merged firm, Halal Guys (H).
ii) Find the reaction function of the unmerged firm, Shawarma Snack Centers (S) as a result of
the merger.
iii) Find total output and market price.

iv) Explain why the market price is higher or lower after the merger.
4. Given the payoff matrix of each game, identify the Nash equilibrium. Show how you arrive at the
solution.
a.

Boy

Torpe
Wink
Say hi

Torpe
0, 2
1, 4
2, 1

Girl
Wink
3, 1
2, 1
4, 4

Say hi
2, 3
4, 1
3, 2

b.

Player R

Player A
Lie
Give you up
15, 12
Let you down 13, 11
Run around
12, 11
Make you cry
14, 13

Hurt
14, 12
13, 12
14, 11
15, 14

c.
Democrats

Republicans

Up
Upper
Middle
Middle
Lower
Middle
Down

Left
4, -1

Left of
Center
3, 0

Center
-3, 1

Right of
Center
-1, 4

Right
-2, 0

-1, 1
2, 1

2, 2
-1, -1

2, 3
0, 4

-1, 0
4, -1

2, 5
0, 2

1, 6
0, 0

-3, 0
1, 4

-1, 4
-3, 1

1, 1
-2, 3

-1, 4
-1, -1

d.

Sparta

Fight
Defend
Retreat

Athens
Fight
Defend
-1, -1
0, 0
0, 0
1, 1
0, 0
0, 0

Retreat
0, 0
0, 0
1, 1