Work Sheet For Econ 2022

Addis Ababa University
College of Business and Economics

Department of Economics
Econ 2022: Microeconomics II (Regular)

Academic Year: 2020-2021
Semester: II
Tewelde Fissehatsion
Work Sheet #1
I. Say True or False and Explain why you said so.

1. In Cournot equilibrium each firm chooses the quantity that maximizes its own
profits assuming that the firm's rival will continue to sell at the same price as
before.
2. In Bertrand competition between two firms, each firm believes that if it changes its
output, the rival firm will change its output by the same amount.
3. Suppose that the demand curve for an industry's output is a downward sloping
straight line and there is constant marginal cost. Then the larger the number of
identical firms producing in Cournot equilibrium, the lower will be the price.
4. A Stackelberg leader chooses his actions on the assumption that his rival will adjust
to the Leader’s actions in such a way as to maximize the rival's profits.
5. A duopoly in which two identical firms are engaged in Bertrand competition will not
distort prices from their competitive levels.
6. A Stackelberg leader will necessarily make at least as much profits as he would if he
acted as a Cournot oligopolist.
7. In the Cournot model, each firm chooses its actions on the assumption that its rivals
will react by changing their quantities in such a way as to maximize their own
profits.
II. Work Out
8. An industry has two firms. The inverse demand function for this industry is p = 320-
4q. Both firms produce at a constant unit cost of $20 per unit. What is the Cournot
equilibrium price for this industry?
9. A city has two newspapers. Demand for either paper depends on its own price and
the price of its rival. Demand functions for papers A and B respectively, measured in
tens of thousands of subscriptions, are 21−2 P a+ P b and21+ P a−2 P b . The
marginal cost of printing and distributing an extra paper just equals the extra
advertising revenue one gets from another reader, so each paper treats marginal
costs as zero. Each paper maximizes its revenue assuming that the other's price is
independent of its own choice of price. If the papers enter a joint operating
agreement where they set prices to maximize total revenue, by how much will
newspaper prices rise?
10. The demand for y is given byY =256/ p2. Only two firms produceY . They have
identical CostsC ( Y )=Y 2. If they agree to collude and maximize their joint profits,
how much output will each firm produce?
11. A duopoly faces the inverse demand curve p=160−2 q . Firm 1’s total cost function is
given by C 1(q1 )=8 q 1 and Firm 2’s total cost function is given by C 2 ( q 2 )=10 q 2 .
Where q 1+ q2=q
a) Which firm produces more in the Cournot equilibrium?
b) Assuming that the low cost firm is the price leader, how much output will
each firm produce?
c) If the firms form a cartel with the aim of maximizing industry profits, what
would be the optimal industry output that maximizes joint (industry) profit?
Find also the optimal outputs that each firm should produce.
12. Consider a market with one large firm and many small firms. The supply function of all
of the small firms together is given by q s ( p )=200+ p ; the market demand curve is given
by Q ( p )=400− p ;and the cost function for the large firm is C L (q L )=20 q L .
a) Find the residual demand curve for the large firm
b) Assuming that the large firm is the price leader, find the optimal output levels supplied
by the small firms and by the large firm.
13. Rama Motors is the dominant used car dealer in a certain small city. After paying
$50,000 for overhead, Rama Motors' cost per car is $500. There are 4 other small used
car lots in this town, but since they are not large enough to purchase cars through the
same discount sources as Rama, each firm faces the cost functionC=5,000+700 Q+5 Q2.
The demand for used cars isQ=500−( 1/5) P. Assuming Rama sets the market price so
as to maximize its profit, how many cars will each of the follower firms supply?

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Addis Ababa University

College of Business and Economics

Econ 2022: Microeconomics II (Regular)

I. Say True or False and Explain why you said so.

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