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Problem 3
Consider a market with two firms. Each firm is located at one end of a line with lenght one.
There is a mass one of consumers. The location of each consumer is given by 0 < x < 1
which is uniformly distributed (with density 1). Firms have no cost of production and set
price simultaneously.
a) Derive the demand for each firm by identifying the location of the indifferent con-
sumer for each price pair. Assume that all consumers know about both products.
b) Write down the profit functions and calculate the Nash equilibrium prices for both
firms.
c) Assume that consumers only know the product if they have received and ad. Suppose
that ads are not targeted and each firm reaches any consumer with probability 0.5
with her ad. Calculate the size of the different consumer segments. Determine the
resulting demand and the new Nash equilibirum prices of the firms.
d) Suppose that the ads are costless. When do the firms make larger profits? With
fully informed consuemers b) or with imperfect ads c)?
Draft a graph which shows the law of supply and demand to explain to conditions as below:
You are operating a budget hotel. Coincidently, this is matching the trend/ popularity that a large group of budget concerned travellers are seeking for the stay which charge lower room rates.
Government has announced to subsidise for the firms which are involving in tourism industry.
Government has implemented the increase of company tax for 2% as to raise the fund to develop the infrastructure of the nation.
Surge in household disposable income.
a. The chief financial officer tells the CEO that it’s better to produce only one shoe this month. What could be the reason for this advice by the CFO? What are the firm’s profits at that level of production? Is this the best decision? Explain. (1 Mark)
Discuss South Africa’s focus on the public sector wage bill as an expenditure control measure.
With respect to the problem of consumer equilibrium, what is a corner solution
The equilibrium price of coffee mugs rose sharply last month, but the equilibrium quantity was the same as ever. Three people tried to explain the situation. Which explanations could be right? Explain your logic
Q: 2 A firm faces the production function Q = 12K0.4 L0.4 and can buy the inputs K and L at prices per unit of £40 and £5 respectively. If it has a budget of £800 what combination of K and L should it use in order to produce the maximum possible output? Show graphically as well.
Suppose a 3 percent increase in the price of corn flakes causes a 6 percent decline in the
quantity demanded. What is the price elasticity of demand for corn flakes?
The impact of Covid-19 on economic growth in developed and developing countries (GDP).
A mining corporation purchased $120,000 of
production machinery and depreciated it using 40%
bonus depreciation with the balance using 5-year
MACRS depreciation, a 5-year depreciable life, and
zero salvage value. The corporation is a profitable
one that has a 22% combined incremental tax rate.
At the end of 5 years the mining company
changed its method of operation and sold the
production machinery for $40,000. During the 5
years the machinery was used, it reduced mine
operating costs by $32,000 a year, before taxes. If
the company MARR is 12% after taxes, was the
investment in the machinery a satisfactory one?
