9781118041581

b. With multiple rounds, the buyer could vary its purchases to

encourage lower prices (for instance, by purchasing 6 units at P $6,

2 units otherwise). If this succeeds, the resulting payoff is (12, 18).

c. Maximum total profits (32) are achieved at Q 8 units. A negotiated

price of P $6 (an equal profit split) appears to be equitable.

Chapter 11

1. Although there could be some cost economies from such a merger, the
   main effect on consumers likely would be higher soft-drink prices.
   Aggressive price competition to claim market share would be a thing of
   the past. Because the merged entity would account for over 80 percent of
   total soft-drink sales, the United States Justice Department would be likely
   to fight such a merger on the grounds that it would create a monopoly.


2. a. Setting MR MC, we have: 500 20Q 150, or QM17.5 thousand
   units and PM$325.
   b. Under perfect competition, PCLAC $150 and QC 35
   thousand.
   c. With a $100 tax, the monopolist’s MC is 250. Setting MR MC, we
   find QM12.5 thousand and PM$375.
   d. The efficient solution calls for a double dose of regulation: promote
   perfect competition while taxing the externality. The efficient price is:
   PCLMC MEC  150  100 $250. The corresponding (efficient)
   level of output is 25 thousand units. This is the optimal solution. All of
   the analysts’ recommended outcomes are inefficient. (Of the three, the
   part (a) outcome, Q 17.5 thousand is the best. It comes closest to the
   efficient outcome, implying the smallest deadweight loss).


3. a. The competitive price of studded tires is PCAC $60. The price
   equation P  170 5Q can be rearranged as Q  34  .2P. Thus,
   one finds the competitive quantity to be QC 34 (.2)(60)  22
   thousand tires.
   b. The full MC of an extra tire is 60  .5Q. Equating industry demand to
   marginal cost, we find P  170 5Q  60  .5Q. Therefore, the
   optimal quantity is Q 20 thousand tires. The optimal price is 170 
   (5)(20) $70. Net social benefit is the sum of consumer surplus and
   producer profit, net of external costs. Consumer surplus is (.5)(170 
   70)(20,000) $1,000,000. Producer profit is (70 60)(20,000) 
   $200,000. External costs are C  .25Q^2 (.25)(20)^2 $100
   thousand. Thus, net social benefit is $1,100,000.
   c. At Q 20 thousand tires, the marginal external cost is .5Q* $10
   per studded tire. Set a tax of $10 per studded tire to obtain the

18 Answers to Odd-Numbered Problems

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