Question 1
Concerned about the political fallout from rising gas prices, suppose that the U.S. government imposes a price ceiling of $3.00 a gallon on gasoline.
a. Explain how the market for gasoline would react to this price ceiling if a global shortage of oil sent the equilibrium price of gasoline to $3.50 a gallon.
b. Would the U.S. gasoline market be efficient?
Question 2
The figure below shows the car market in Mexico when Mexico places no restriction on the quantity of cars imported. The world price of a car is $10,000.
If the government of Mexico introduces a $2,000 tariff on car imports, what will be the price of a car in Mexico, the quantity of cars produced in Mexico, the quantity imported into Mexico, and the government’s tariff revenue?
Question 3
The figure below shows the short-run cost curves of a toy producer. The market has 1,000 identical producers and the table shows the market demand schedule for toys.
At a market price of $21 a toy, what quantity does the firm produce in the short run and does the firm make a positive economic profit, a zero economic profit, or an economic loss?
Question 4
Big Top is the only circus in the nation. The table sets out the demand schedule for circus tickets and the cost schedule for producing the circus.
Calculate Big Top’s profit-maximizing price, output, and economic profit if it charges a single price for all tickets.
Question 5
AT&T and Verizon have two pricing strategies: Set a high (monopoly) price or set a low (competitive) price. Suppose that if they both set a competitive price, economic profit for both is zero. If both set a monopoly price, AT&T makes an economic profit of $100 million and Verizon makes an economic profit of $200 million. If AT&T sets a low price and Verizon sets a high price, AT&T makes an economic profit of $200 mil- lion and Verizon incurs an economic loss of $100 million; if AT&T sets a high price and Verizon sets a low price, AT&T incurs an economic loss of $50 million and Verizon makes an economic profit of $250 million.
a. Create the payoff matrix for this game.
b. What is the equilibrium of this game? Is the equilibrium efficient?
