Question

1. Suppose a market is described by demand P = 100 - 2Q and there are two firms engaged in Stackelberg Competition each with a MC = 10 What is the consumer surplus in this market (Round market output to the nearest integer)?

1. 828

2. 1916

3. 1156

4. 1811

Answer 1

Solution :

Given data,

	Find 1 imposter	Protect 1 crew member
Red	30	60
cyan	120	80

In this Red has an absolute advantage in both finding imposter and protecting crew members because it takes less time.

Finding Opportunity cost

	Find 1 imposter	Protect 1 crew member
Red	60/30 = 20	30/60 = 1/2
Cyan	80/120 = 2/3	120/80 = 3/2

So, the opportunity cost of finding 1 imposter is lower for Cyan, and the opportunity cost for protecting 1 crew member is lower for Red(1/2 < 3/2). So, Red should protect crewmembers and Cyan should find imposters.

Cyan gain from trade

Before trade he spent = 2*120+2*80 seconds

=240+160 seconds

=400seconds

After the trade, he only needs to find imposters =2*120

= 240 seconds

Q1.)

Gains from trade = 400-240=160 seconds

Q2.)

Before specialization, Red spent 30*2= 60 seconds to catch imposters and

60*2=120 seconds on protecting the crew.

So total time = 180 seconds