Question

Which of the following is true about monopoly pricing?
(a) A monopolist always prices on the elastic part of its demand curve
(b) A monopolist always prices by setting MR = AC
(c) A monopolist always prices to maximize deadweight loss
(d) A monopolist always sets P = MC to deter entry

Which of the following is true about the concept of Nash equilibrium?
(a) A Nash equilibrium is when all players reach their maximum payoff

(b) The collusive outcome in a one period Cournot game is a Nash equilibrium because indus-
try profits are maximized

(c) In the Cournot model, the Nash equilibrium is found at the intersection of each firm’s best
response function
(d) None of the above

Which of the following cost functions exhibits economies of scale?
(a) C(q) = q(10 + q^2)
(b) C(q) = q^3 + 30
(c) C(q) = q^2 + 10
(d) None of the above

Which of the following is true about vertical integration?

(a) An example of vertical integration is an airline purchasing a bus company

(b) An example of vertical integration is a grocery store purchasing a brand of breakfast cereal

(c) An example of vertical integration is a burger restaurant buying the pizza restaurant across

the street

(d) None of the above

Answer 1

1) For monopoly pricing, a monopoly never operates or prices on the inelastic part of the demand curve because then a rise in quantity will lead to a relatively larger fall in prices such that the negative effect of fall in prices dominates the positive effect of a rise in quantity such that the total revenue falls. Thus option a is correct. A monopolist always prices on the elastic part of the demand curve.

Considering option B, it is not correct since the pricing policy followed by monopolist is MR=MC. Same reason for option d. For option d, p=MC is the condition for a perfect competition market. Option c is obviously incorrect since no market will like to maximise the deadweight loss

2) Nash Equilibrium is defined as the equilibrium in which no player has any incentives for unilateral defection. This happens when both the players are at their best response irrespective of the choice of the other player.

Considering the above definition, option c is correct because it says that nash equilibrium is at the intersection of each firm's best response function which is the definition of nash equilibrium in other words.

3) We can identify whether a company has economies of scale if its Average Cost is a decreasing function. Considering the above cost functions -

a) AC = 10 + q² which is not a decreasing AC function as its derivative 2q>0

b) AC = q² + (30/q) is indeed a decreasing cost function as its derivative (2q - 30/q²) < 0 upto the point where after which the diseconomies of scale starts.[ Note: We can derive the turning point by setting

(2q - 30/q²) = 0 ]

c) AC = q + 10/q which is a decreasing cost function as its derivative (1 - 10/q²) < 0 upto the point where after which the diseconomies of scale starts.

4) Vertical integration is of two types - forward and backward. Vertical intergration is when a firm in a particular line of business operating in a particular stage of production for a product expands his business by producing or purchasing a company producing at some other stage of production such that the operations takes in a single firm and the firm reduces costs in this way.

Considering the situations given in the question, none of the examples represent vertical intergration.

For (a), firstly, airline companies don't manufacture airline. Even if they did, a vertical intergration would have been the situation when the company starts producing some other stage of production. For (c), the burger restaurant too is not going to operate into a new stage of prouction as buying pizza restaurant is like starting to produce a new product line.

(c) seems to be a the correct answer, because the grocery store by purchasing a brand of breakfast cereal won't need to purchase the same from some other manufacturer of breakfast cereal. Its like introducing a store brand which forms a part of vertical integration literature.

Thank You and Best of Luck :)