Question

Hi, I need your answer this question below.Br/H

a) A market has the following demand function: ?(?) = 100 − 5? where y is total sold quantity of the good on the market and ?(?) is the price for which it sells for. What is the price elasticity of demand at y=10? (4 points)

b) True or false? A Nash equilibrium is always a subgame perfect Nash equilibrium. Explain! (3 points)

c) Explain what third-degree price discrimination is and under which circumstances it is likely that it can occur.

d) Assume that there are good spaceships (plums) and bad spaceships (lemons) in the market for used spaceships. The sellers know what they are selling but the buyers do not know what they are buying. Explain under what circumstances the plums might disappear from the market and suggest one way of dealing with this problem?

e) State the Coase theorem and explain the role of transaction costs.

j) A firm produces widgets according to the production function: f(k,L) = k^1/3L where k is capital and L. is labour. Does the firm’s production function exhibit constant- decreasing- or increasing returns to scale? Explain your answer!

Answer 1

Answers :

a)Given :

?(?) = 100 − 5?

y=10

The formula of Price Elasticity of Demand is :

% Change in Quantity Demanded / %Change in Price

the price elasticity of demand when Q=10

dq/dp =-5

Demand Function p(y)=100-5(y)

p=100-(5*10)

p=50

So, Price Elasticity of Demand = -5*50/10

=-25

b)Correct Answer is False

A Nash equilibrium is a combination of strategies for all players in a game where each player is playing the best response  to each other player's actual strategy, which means that each player, acting in isolation, cannot achieve a better outcome for themselves by altering their strategy, given the strategy each other player has adopted. A subgame-perfect Nash equilibrium is a Nash equilibrium with the additional restriction that each individual decision in a player's strategy would be the one that gets them the best outcome, including the decisions which never come up in practice given the strategies that are actually being played (these are called decisions "off the equilibrium path" in game theory parlance). All subgame perfect equilibrium is the Nash equilibrium, but the reverse is not true. A more generally understandable way to describe subgame perfect equilibria are equilibria where "all players' threats are credible."

C) Third Degree Price discrimination means charging different prices for the same product in segments of the market. Third-degree discrimination is linked directly to consumers' willingness and ability to pay for a good or service. It means that the prices charged may bear little or no relation to the cost of production. It involves charging a different price to different groups of consumers for the same good. These groups of consumers can be identified by particular characteristics such as age, sex, location, time of use.

In the real world, third-degree price discrimination is quite common. For a firm to practice price discrimination it requires:

• Ability to set prices. Some market power.
• Ability to segment different classes of consumers (e.g. rail card to prove you are a senior citizen)
• Ability to prevent resale

For example, exporters may charge a higher price in overseas markets if demand is estimated to be more inelastic than it is in home markets. Another example is Rail tickets or flight tickets i.e same destination ticket is sold at different prices as per demand within different groups.

e)Coase theorem is a legal and economic theory that affirms that where there are complete competitive markets with no transactions costs, an efficient set of inputs and outputs to and from production-optimal distribution are selected, regardless of how property rights are divided. The transaction cost approach to the theory of the firm was created by Ronald Coase. Transaction cost refers to the cost of providing for some good or service through the market rather than having it provided from within the firm

In order to carry out a market transaction, it is necessary to discover who it is that one wishes to deal with, to conduct negotiations leading up to a bargain, to draw up the contract, to undertake the inspection needed to make sure that the terms of the contract are being observed, and so on.

Types of Transaction costs are:

• search and information costs
• bargaining and decision costs
• policing and enforcement costs

Coase contends that without taking into account transaction costs it is impossible to understand properly the working of the economic system and have a sound basis for establishing economic policy.