BA533: Economics for Managers THE PENNSYLVANIA STATE UNIVERSITY

Fall 2017 Smeal College of Business

PRACTICE PROBLEMS

1. You are considering selling a car that you bought five years ago. Which of the following should
not be a factor in your decision?

a. the price that you can get for the car

b. the price that you paid for the car

c. the extra space that you will have in your garage if you get rid of the car

d. the loss in convenience from no longer having an extra car

e. any possible future appreciation in the value of the car

2. The Buchanan family has two identical cars. The gas tank of one was filled when the price of
gasoline was low and the other at a time when gas prices were high. If the family is rational,
which car should they take for a weekend drive to view the fall foliage? (Select an answer and
then briefly explain your choice.)

a. The car with the tank filled when the price of gas was low.

b. The car with the tank filled when the price of gas was high.

c. Either car, it doesn't matter.

d. They should balance the use of gas on the margin by driving each car half way.

3. Stephen has been standing in the liftline for twenty (20) minutes trying to get on the chairlift. He
paid $30.00 for a lift ticket which is good for the entire day and has not yet skied. The weather is
getting bad, but if he waits five more minutes he will definitely get on the chair and be able to ski
for twenty minutes. According to the principles of sunk cost and opportunity cost decision-
making, and assuming no other considerations affect his decision, which of the following
statements best describes the rationale he should use to decide whether it is worth waiting the
extra five minutes?

a. He should compare the reduction in his satisfaction caused by twenty-five minutes of waiting
and paying $30.00 for a lift ticket to the increase in satisfaction he will get from skiing twenty
minutes.

b. As in (a), he should compare the reduction in satisfaction caused by waiting for twenty-five
minutes and the benefits he will get from skiing twenty minutes, but he should not consider
the cost of the lift ticket since that is good for the whole day.

c. He should compare the reduction in satisfaction he suffers by waiting five more minutes to
the increase in satisfaction of skiing twenty minutes.

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d. He should keep waiting and skiing for the rest of the day so that the money he spent on the
lift ticket will not have been a waste.

4. (i) Give an example of a production process in which the short run is less than a month.
(ii) Give an example of a production process in which the short run lasts anywhere from one to
three years

5. Suppose that a firm must pay an annual franchise fee, which is a fixed sum, independent of
whether it produces any output. How does this fee affect the firm's fixed, marginal, and average
costs?

6. According to a 1989 Wall Street Journal article "MCI, in New Phone War Skirmish, Files Suit
Over AT&T Ad Claims," MCI was upset with AT&T over allegedly false claims that AT&T's
service is cheaper than MCI's. The following problem looks at some of the pricing issues that
might arise in this industry, as well as a typical consumer choice problem. Suppose that the
typical consumer is a small business, Woodbrook Electronics. Woodbrook uses MCI as their
long-distance carrier and currently places 100 calls per month. MCI charges a price of $0.80 per
phone call. Woodbrook used to subscribe to AT&T and placed 90 calls per month at AT&T's old
rate of $.90 per phone call, but switched to MCI to take advantage of the lower price. In response
to losing customers like Woodbrook, AT&T recently changed its pricing structure to the
following: $1.00 per call for the first 60 calls, $.80 per call for the next 40 calls, and $.50 per call
for all remaining calls.

a. Assuming Woodbrook's demand curve is linear, how many calls would Woodbrook place
under AT&T's new price schedule? Illustrate.

b. At this number of calls, which company is charging the lower marginal price, AT&T or MCI?

c. Taking Woodbrook as a typical customer, and given their consumption choices, which
company is charging the lower average price?

d. Given your answers above, does MCI have reason to be upset with AT&T's advertising?

e. Should Woodbrook consider switching back to AT&T? Why or why not? Illustrate.

7. Major software companies, after years of providing unlimited free telephone technical support for
their products, have recently begun to charge for these services (typically after an initial start-up
period of 90 days). Most companies offer two pricing plans. For instance, Lotus Development
offers users of their spreadsheet software the option of paying either (i) $2.00 per minute for
telephone support or (ii) a $129 flat charge for a year of unlimited toll-free calls.

a. Consider a customer with a yearly demand for service support of P = 11 – 0.1Q, where P is
the price per minute and Q is the number of minutes of calls made per year. How many calls
would this customer make under plan (i)? Why? How many calls would he or she make
under plan (ii)? What would be the annual cost to this customer under each plan? Illustrate.

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b. Which plan would this customer choose? Explain.

8. When the price of electricity was increased by 8 percent in California, the demand for natural gas
increased by 3.2 percent in the manufacturing sector and by 6.4 percent in the residential sector.
The demand for electric power tools, however, decreased by 1 percent. What is the cross-price
elasticity of demand between electricity and

a. natural gas in the manufacturing sector? natural gas in the residential sector? electric power
tools?

b. Are electricity and natural gas substitutes or complements? How about electricity and
electric power tools? Explain.

9. Consider the following three demand curves (where P is in dollars and Q is in units):

(1) Q = 200 – P
(2) Q = 100 - 0.5P
(3) Q = 200 - 0.5P

a. What is the slope of each of these demand curves? (Be specific as to how you define the
slope.)

b. At a price of $20, how do the price elasticities of demand compare across the three demand
curves?

c. A classmate comes to you and asks whether the elasticity of demand is the same as the slope
of the demand curve. What would your answer be?

10. Suppose the Board of Trustees at London Business School wants to raise additional revenues by
increasing fees for students. There are many possibilities, for example, increasing tuition or
increasing prices for housing or textbooks. If the Board's only objective is to increase revenues in
the most efficient manner (that is, they do not consider the consequences of their decisions on
student income), then they should focus on goods where, at current prices

a. demand for the goods is inelastic.

b. demand for the goods is elastic.

c. they already derive a great deal of revenue; these are the settings that hold out the greatest
promise as additional sources of revenue.

d. both demand and supply have approximately the same elasticity.

11. The owner of a soccer team and local stadium has commissioned a study that showed the demand
by fans for stadium seats (per playing date) to be

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P = 22 - 0.2Q,

where P is the average price of a ticket and Q represents the number of seats (expressed in
thousands). The local stadium seats a maximum of 56,000 per game. The price has been set at
$10 per ticket. (Note: We are assuming for simplicity that all seats are the same in this problem.
The same analysis would apply for each type of seat otherwise.)

a. How much revenue does the owner make at the current price?

b. Assuming that the owner is first and foremost interested in maximizing revenue, has he
overpriced or underpriced tickets?

c. The owner comes to you and says he will give you 10% of any increase in revenues that you
can generate for him this coming season. Given that you can only charge a per ticket price,
how much money can you expect to make per game during the coming season?

d. Is there an optimal number of empty seats (per playing date) from the owner’s point of view?
If so, what is it?

12. The demand function for compact Hertz rental cars at Boston's Logan Airport has been estimated
to be:

QHC = 26.01 + 2.45PCC + 1.82PHS - 3.60PHC

where QHC represents the number of compact cars rented per day by Hertz, PCC is the average
rental price of competitors' compacts, PHS is the rental price of Hertz's subcompacts, PHC is the
rental price of Hertz's compacts. All prices are in dollars per day. The current rental prices are
PCC = 24.50, PHS = 21.95, and PHC = 24.95.

a. What are the cross-price elasticities of demand between Hertz's compact cars and their
competitors' compacts? Between Hertz's compact cars and its own subcompacts?

b. Derive an expression for the demand curve for Hertz's compact cars, setting PCC and PHS to
their current values. What is the slope of the demand curve? What is the price elasticity at
the current price? Does the magnitude of the price elasticity make economic sense?

c. If you had done the demand estimation, are there other variables you would have included in
the demand curve? Explain.

d. For each of the variables you chose in c., would you expect an increase in the variable to
cause QHC to rise or fall? Explain your reasoning.

13. The Shamrock Company, a firm in the perfectly competitive custom jewelry industry, is having a
bad year financially. Their total revenue is $110,000, with total fixed costs of $80,000 and total
variable costs of $120,000. Their financial advisor tells them: "Despite your losses, you should
stay in business in the short-run. Your revenues are more than enough to cover your fixed costs,

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which you have to pay anyway, and you still have $30,000 left over to cover some of your
variable costs." Do you agree with this assessment? Why?

14. Suppose a chemical firm is producing 100 units of output with MC = $8, AVC = $7, and ATC =
$9. The prevailing price of the product in the market is $8.50. There are many substitutes for this
firm's product, so that this firm's sales would fall dramatically if it tried to raise the price. In
order to maximize short-run profits (or minimize short-run losses if that is the best the firm can
do) the firm should:

a. increase the selling price to some point above $9.

b. increase its output until MC equals $8.50.

c. shut down production in the short-run since it is losing money.

d. reduce its output so as to lower MC, AVC, and ATC and earn an economic profit.

15. Which of the following statements about profit maximization and equilibrium in a perfectly
competitive market are necessarily true in a long-run equilibrium?

i) price equals the minimum of long-run average total cost

ii) price equals long-run marginal cost

iii) economic profit is zero

16. What is the difference between economic profit and producer surplus?

17. Suppose wheat farmers are all perfect competitors in the sense that each of them individually
faces a perfectly elastic demand curve. Is the following statement true, false, or uncertain? If a
drought kills half of the wheat crop in Europe, there will be no change in the price per bushel
received by the farmers whose crops survived.

18. In 1976, a frost in Brazil killed over 500 million coffee trees and damaged many more. A civil
war in Angola, a major supplier of coffee, cut back its crop. And an earthquake in Guatemala
disrupted the flow of coffee from this country. In spite of these calamities, these three producers
reported an increase in export earnings from coffee sales. On the basis of this information, which
of the following must be true?

a. The demand for coffee is elastic.

b. The supply of coffee is elastic.

c. The demand for coffee is inelastic.

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d. The supply of coffee is inelastic.

e. Both (a) and (b).

19. In a discussion of tuition rates, a university official argues that the demand for admission is
completely price inelastic. As evidence she notes that while the university has doubled its tuition
(in real terms) over the past 15 years, neither the number nor quality of students applying has
decreased. Would you accept this argument? Explain briefly. (Hint: The official makes an
assertion about the demand for admission, but does she actually observe a demand curve? What
else could be going on?)

20. Suppose the supply curve for a good were completely inelastic. If the government imposed a
price ceiling below the market-clearing level, would a deadweight loss result? Explain.

21. In 1987 Senator Edward Kennedy sponsored legislation to increase the minimum wage in the
United States by 15 percent. He said that those who will gain from the increased minimum wage
"will far outnumber" those who lose their jobs. What was Kennedy implicitly assuming about the
elasticity of the demand for labor and/or the supply of labor?

22. A rent control policy setting monthly rent at $1000 on apartments is being considered in San
Francisco, where the demand for apartments is given by P = 2600 - Q and the supply of
apartments is P = 500 + Q (where P = dollars of monthly rent, and Q = number of apartments
available for rent). For purposes of this analysis, apartments are treated as identical. Assuming
that the market is currently in equilibrium, what will be the loss in producer surplus if the price
ceiling is imposed?

23. A steel mill operates near a river that is used by the public for fishing and canoeing. The firm's
marginal cost curve is MC = 10 + 6q, where q is measured in tons of steel per day. The county
commission has calculated that the marginal external cost of the pollution by the steel mill is $12
per ton of steel. The market price is $100 per ton. What is the difference between the firm's
profit maximizing output level and the output level that society would prefer? (Assume for
simplicity that the market price remains constant.)

a. The firm will choose q = 15; society would prefer q = 14.6.

b. The firm will choose q = 14.6; society would prefer q = 15.

c. The firm will choose q = 15; society would prefer q = 13.

d. The firm will choose q = 13; society would prefer q = 15.

e. The firm will choose q = 15; society would prefer q = 0.

24. The total and marginal cost functions for a typical coal producer are:

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TC = 75,000 + 0.1q2 and MC = 0.2q

where q is measured in railroad cars of coal sold per year. The industry consists of 55 identical
coal producers. The market demand curve is QD = 140,000 - 425P, where P is the price per
railroad carload. The market is perfectly competitive.

a. Derive the equation for the firm's supply curve and the market supply curve. Show that the
market equilibrium price is $200. Find the market equilibrium quantity and the quantity that
each firm will produce. Calculate the firm's profit (or loss).

b. The federal government now imposes a $15 per carload tax on coal, which will result in a
new market supply curve of QS = -4125 + 275P. The demand curve is still QD = 140,000 -
425P. The pre-tax market equilibrium price is $200. Calculate the new short-run equilibrium
price and market quantity. Calculate the elasticities of demand and supply at this new
equilibrium price. What portion of the $15 tax will be paid by producers and what portion
will be paid by consumers? Does your answer make sense in terms of the elasticities?

25. A vegetable fiber is traded in a highly competitive world market, and the world price is $9 per
pound. Unlimited quantities are available for import into Germany at this price. The German
domestic supply and demand for various price levels are shown below.

Price German Supply German Demand

(million pounds) (million pounds)
3 2 34
6 4 28
9 6 22
12 8 16
15 10 10
18 12 4

Answer the following questions about the German market:

a. What is the equation for demand? What is the equation for supply?

b. If there are no tariffs, quotas, or other trade restrictions on this fiber in Germany, what will be
the German price and level of fiber imports?

c. If Germany imposes a tariff of $9 per pound, what will be the German price and level of
imports? How much revenue will the government earn from the tariff? How large is the
deadweight loss?

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d. If Germany has no tariff but imposes an import quota of 8 million pounds, what will be the
domestic price? What is the cost of this quota for German consumers of the fiber? What is
the gain for German producers?

26. Japan largely prohibits the importation of rice. Japan's Ministry of Agriculture, Forestry and
Fisheries has argued for years that foreign rice must be kept out to ensure food security and
protect Japan's rice culture. The supply of rice by domestic Japanese producers is given by

P = 0.1QS,

where QS is the quantity supplied by Japanese producers (in millions of pounds), and P is the
price per pound of rice (in dollars) in Japan. The demand curve for rice in Japan is

P = 18.9 - 2QD,

where QD is the quantity of rice (in millions of pounds) consumed.

e. When imports of rice into Japan are completely prohibited, what is the price of rice there?
How much rice is produced and consumed?

f. The world price of rice equals $0.85 per pound. Assume that Japan can import as much rice
as it wants at that price. What would the price of rice in Japan equal if the country eliminated
all restrictions on the importation of rice? How much rice would be consumed in Japan in
this case? How much rice would be produced in Japan? How much would be imported?

g. Illustrate the welfare effects on the Japanese domestic economy from the current Japanese
policy prohibiting the importation of rice. Does Japanese society gain or lose on net?
Identify the winners and losers. (No calculations necessary.)

27. Suppose Sweden imports 100,000 telephones at the world price of $20 to meet its annual demand
for telephones. Assume the following:

• There is no domestic industry and domestic production remains zero.

• Demand elasticity is -2.0 at the current level of consumption.
• Swedish demand does not affect the world market price of phones.

If Sweden imposes a quota limiting annual imports to 80,000, what would happen to the price of
phones in Sweden?

h. No effect.

i. Cannot be determined due to lack of information about the elasticity of world supply.

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j. Price will increase by $2.

k. Price will increase by $4.

28. Which of the following is true for a monopolist setting its output level where P = MC?

a. The monopolist is maximizing profit.

b. The monopolist is not maximizing profit and should increase output.

c. The monopolist is not maximizing profit and should decrease output.

d. The monopolist is not maximizing profit and should lower price.

29. A software firm has a new personal computer operating system called "Doors 2000." this new
product is so far superior to anything currently available that it will immediately gain monopoly
status. The demand curve for this product is given by P = 100 - 0.5Q, where Q is output sold
(measured in millions of units) and P is the price, in dollars per unit. The marginal cost of
production is given by MC = 5. For simplicity, assume there are no fixed costs. What are the
monopoly price and quantity?

30. In 1977, a big year for auto sales in the United States, the Big Three domestic auto producers sold
9,054,000 cars. Total dollar sales for the three companies were $109.5 billion, with a reported
after-tax accounting profit of $5.2 billion. Estimated economic profits that year were roughly
$500 million. Under competitive conditions approximately 9,087,000 cars would have been
sold. Estimated average costs (including opportunity costs) in 1977 were $12,039 per car.
Assume that average cost is constant at $12,039 and equal to marginal cost.

a. Assuming the Big Three auto producers acted together as a monopoly (i.e., a cartel), calculate
the resulting monopoly DWL triangle in 1977.

b. How does the DWL compare to the transfer of surplus from consumers to producers?

31. The industry demand curve for a particular market is:

Q = 1800 - 200P.

The industry exhibits constant marginal cost of $1.50 per unit of output at all levels of output,
regardless of the market structure. Calculate market output, price (if applicable), consumer
surplus, and producer surplus (profit) for each of the scenarios below. Compare the welfare
generated and who it accrues to in each case.

a. Perfect competition.

b. Pure monopoly.

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c. First degree price discrimination.

32. If market entry is not costly (i.e., if the barriers to entry are low), is predatory pricing a wise
strategy? Explain why or why not.

33. Suppose that a firm with constant marginal costs can sell its output in two geographically
separated markets between which arbitrage is not possible. Which of the following statements is
true?

a. The marginal revenue in the first market must be equated to marginal cost in order to
maximize profit in that market.

b. The marginal revenue in the second market must be equated to marginal cost in order to
maximize profit in that market.

c. The marginal revenue in the two markets must be equated in order to maximize overall
profits.

d. All of these.

e. None of these.

34. American Tire and Rubber Company sells identical radial tires under the firm's own brand name
and to discount stores for private labeling. Marginal cost is a constant $10 per tire, regardless of
the sub-market in which the tire is sold. The firm has estimated the following demand curves for
each of the markets.

PB = 70 - 0.0005QB (brand name) and

PP = 20 - 0.0002QP (private label).

Quantities are measured in thousands per month and price refers to the wholesale price. AT&R
currently sells brand name tires at a wholesale price of $28.50 and private label tires for a price of
$17.

a. How much profit does AT&R make at these prices? What is the current level of marginal
revenue for brand name tires? What is the current level of marginal revenue of private label
tires.

b. Can you change prices and increase profits while still using only per unit prices? (That is,
using simple market segmentation pricing, can you do better?) Answer this question based
on your answer to part (a), without further calculations.

c. Now do some additional calculations to give a numerical answer to part (b). What market
segmentation prices would you set?

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35. A firm setting a two-part tariff with only one customer type should set the entry fee equal to

a. marginal cost.

b. consumer surplus.

c. marginal revenue.

d. price.

36. Some retail video stores offer two alternative plans for renting films:

A two-part tariff: Pay an annual membership fee (e.g., $40), and then pay a small fee for the
daily rental of each film (e.g., $2 per film per day).

A straight rental fee: Pay no membership fee, but pay a higher daily rental fee (e.g., $4 per
film per day).

What is the logic behind the two-part tariff in this case? Why offer the customer a choice of two
plans, rather than simply a two-part tariff?

37. Merriwell Corporation has a virtual monopoly in the ultra high speed computer market.
Merriwell has recently introduced a new computer that will be used by satellite installations that
all have identical demands for the computers. Merriwell's managers have decided to lease rather
than sell the computer, but they have been unable to decide whether to use a single hourly rental
charge or a two-part tariff. Under the two-part tariff, users would be levied an "access charge"
plus an hourly rental rate. Merriwell's marketing staff estimates the demand for each potential
user is given by:

P = 45 - 0.025Q,

where P = price per hour of computer time, and Q = the number of hours of computer time leased
per month. Merriwell offers its users extensive maintenance assistance and technical support. The
firm's engineers estimate that marginal cost is $40 per computer hour.

a. Assuming that Merriwell chooses to set only an hourly rate, what will the firm's price and
output be?

b. Assuming that Merriwell uses a two-part tariff, what "access charge" and hourly rental fee
should it set? Compare the firm's revenues and costs under the options in (a) and (b).

c. Briefly describe how differing demand curves among the various buyers would alter the
optimal two-part tariff if the firm cannot distinguish different customer types.

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38. PitaPita is a new restaurant in town. the owners have asked you to help establish menu prices.
The following table represents the preferences of the two types of patrons served in equal
numbers, as well as the marginal cost per item.

Willingness To Pay

Consumer A Consumer B Marginal Cost

Pita Sandwich $4 $5 $1

Salad $3 $1 $0.50

The owner wishes to maximize profits. In comparing profits from setting a single price for its
combination plate (pita and salad) to profits from charging separately for each item, you advise

a. selling a combination plate at a price of $7.

b. selling a combination plate at a price of $6.

c. charging $5 for pitas and $1 for salads.

d. charging $4 for pitas and $3 for salads.

e. charging $4 for pitas and $1 for salads.

39. Two firms operating in the same market must choose between a high price and a low price. Firm
A's profit is listed before the comma, B's profit is listed after the comma.

Firm B
Low Price High Price
Firm A Low Price 36,36 50,12
High Price 12,50 45,45

a. What is the equilibrium strategy for each of these two firms? Explain.

b. Could they do better? How?

40. Suppose two large firms dominate the auto market in Scandinavia -- Fjord Motor Company and
DIceler. Last year, each firm spent $400 million on advertising and earned $200 million in profit.
Fjord believes, however, that by increasing its advertising budget by $50 million, it can capture
enough of DIceler's market so that even after factoring in the cost of the advertising, it can raise
its profits by $40 million. (This assumes that DIceler does not increase its advertising efforts, in
which case its profits go down by $60 million.) DIceler believes the same thing -- that it can
increase its advertising expenditures by $50 million, steal some of Fjord's market, and increase its

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profits by $40 million. Here again, if Fjord did nothing while Iceler increased its advertising,
Fjord's profits would decrease by $60 million. If both firms increase their advertising by $50
million however, their efforts cancel out, and each firm simply loses the extra $50 million it
spends on advertising.

a. Construct a profit payoff matrix as viewed by Fjord and DIceler. The two advertising
strategies considered by the firms are "No increase" and "Increase by $50 million."

b. Does each firm have a dominant strategy? Explain. What will be their joint profits if each
firm follows its dominant strategy?

c. What should these firms do to maximize their joint profits? If they cannot achieve the joint-
profit maximum is it likely that they will over- or under-advertise? Why?

41. Suppose that Boeing and Airbus are the only two firms that can produce a particular type of
aircraft. Each has the choice of producing or not producing it. The profits (in millions of dollars)
for each firm are as follows:

Airbus
Produce Don’t Produce
Boeing Produce 10,-40 250,0
Don’t Produce 0,200 0,0

where the first number refers to Boeing's profits and the second number refers to Airbus's profits.
Boeing developed this type of aircraft first, and so it can make the first move.

a. What is the equilibrium or likely outcome of this game?

b. Suppose the European governments commit themselves to pay Airbus a subsidy of $50
million if it produces the aircraft. What will be the outcome now?

c. Will the subsidy discourage Boeing from producing the aircraft? Are there conditions under
which your answer would change? Briefly explain.

42. We can think of the U.S. and Japanese trade policies in a game theory setting. The two countries
are considering policies to open or close their import markets. Suppose the payoff matrix is:

Japan
Open Close
U.S. Open 10,10 5,5

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Close 9,5 1,1

a. Assume that each country knows the payoff matrix and believes that the other country will
act in its own interest. Does either country have a dominant strategy? What will be the
equilibrium policies if each country acts rationally to maximize its welfare?

b. Now assume that Japan is not certain that the U.S. will behave rationally. In particular, Japan
is concerned that U.S. politicians may want to penalize Japan even if that does not maximize
U.S. welfare. How might this affect Japan’s choice of strategy? How might this change the
equilibrium?

43. Suppose two firms are considering the introduction of new brands of roller-blade skates. The
pay-off matrix is as follows:

Firm 2
Introduce Don’t Introduce
Firm 1 Introduce -8,-8 50,1
Don’t Introduce 1,50 2,2

a. Are there dominant strategies for either of the two players in this game? Explain.

b. What is (are) the best-response or Nash equilibrium (equilibria) of this game? Explain.

c. If Firm 1 already produces a similar product and for this reason can bring the new product to
market more quickly, then what is the most likely outcome of this game? Why?

44. Oligopolies face a substantial problem policing tacit agreements. Some actions taken by a firm or
firms can penalize both the cheater and those firms that maintain higher prices. A more efficient
punishment is one that is targeted directly on the cheaters.

Consider the notices that some electronic appliance stores put in newspapers, like the following,
for example: "WE WILL BEAT ANY AD PRICE! If you see a lower advertised price for any
model we stock, we will be happy to beat the price! AND, even after your purchase, if you find a
lower price within 30 days, we'll refund the difference--plus 10% of the difference!!"

a. What do the advertisements promise? Can this be a method of enforcing uniform prices and
punishing anyone who cuts prices? Explain.

b. Might customers get lower prices if retailers were prevented from making this offer?

45. Market demand is given by P = 1000 - 0.5Q. There are two firms in the market that compete by
simultaneously choosing quantities. Marginal cost for Firm 1 is MC1 = 400 and marginal cost for
Firm 2 is MC2 = 250.

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a. Find Firm 1's marginal revenue curve and reaction function.

b. Find Firm 2's marginal revenue curve and reaction function.

c. Solve for the Cournot equilibrium quantities by finding the intersection of the reaction
functions.

46. Explain how each of the following would affect the operation and strength of a cartel:

a. Market demand for the good is relatively inelastic.

b. The cartel supplies all of the world's output of the good.

c. Cartel members have substantial cost advantages over non-member producers.

d. The supply of non-cartel members is very price elastic.

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