ECON 213 Problem Set 4

Liberty University Econ213 Problem Set 4 complete solutions correct answers keyProblem Set 4 is due by 11:59 p.m. (ET) onÿFridayÿof Module/Week 8.1.ÿÿÿÿÿÿMonopolies can sometimes find themselves in difficult financial situations that lead to losses. Suppose Mr. Burns? power company has a monopoly for providing electricity in Springfield. His costs of upkeep are so high that he is consistently losing money.a.)ÿÿÿÿShow this outcome in a completely labeled graph. Clearly identify all parts of your graph, including the best price and output for the firm as well as the losses.Now, answer the following:b.)ÿÿÿÿWhat happens to the market output when Mr. Burns raises the price he charges?c.)ÿÿÿÿWill this stop his losses? Why or why not?2.ÿÿÿÿÿÿAssume the following game is played one time only. Based on the information in the payoff matrix below, PNC Bank and Citizens Bank are considering an implicit collusive agreement on interest rates. Payoffs to the two firms are represented in terms of profits in thousands of dollars.Citizens BankÿCollude: Raise RatesÿDefect: Keep Rates Where They AreÿPNCÿCollude: Raise Rates(900, 600)ÿ(700, 800)ÿDefect: Keep Rates Where They Areÿ(1100, 300)ÿ(800, 400)a.)ÿÿÿÿDoes PNC have a dominant strategy? What is it?b.)ÿÿÿÿDoes Citizens have a dominant strategy? What is it?c.)ÿÿÿÿDoes the result of your answer change if the game is played an infinite number of times? Why or why not? Properly use game theoretic terminology in your answer.3.ÿÿÿÿÿÿWhat is the profit-maximizing output of the monopolist shown below? ___________What price do they set? _______________________What is the monopolist?s markup over the competitive price? ________________Why will this price not fall?4.ÿÿÿÿÿÿLevi?s has an advertising slogan: ?Quality never goes out of style.? Consumers can buy other kinds of jeans, including off-brands. The manufacturers of off-brand, or generic, jeans do not advertise. Assume that the average total cost of producing Levi?s and generic jeans is the same.a.)ÿÿÿÿCreate a graph showing the price (labeled as P1) that Levi?s changes. Also, identify the markup.b.)ÿÿÿÿHow does Levi?s advertising affect their profits?c.)ÿÿÿÿDo Levi?s or the generic producers have a stronger incentive to maintain quality control? Why?