3. Consider an industry composed of 3 firms and facing demand P(Q)=I-Q, where Q=ql+q2+ q3.The three firms are identical, each producing using a plant that exhibits quadratic cost(qi)=1/2q,. What are the Cournot equilibrium quantity and prices (a).3/5,2/5 (b).4/5,7/5 (c).8/5,6/5 (d).2/5,2/5 The only combination of price and quantity that satisfies the demand equation is(a). Others do not 4. Consider the Salop's circular city model. What happens to the prices charged by the firms in a symmetric equilibrium and the equilibrium number of firms as the transport costs rise (a). Rises, falls (B). Rises, rises (c). Falls, falls (d) Falls, rises The equilibrium price in a Salop' s circular city model is given to be p=c+ where n'=vu/F Plugging back we have p=c+vt/F. Hence as the transport cost rises both the number of firms as well as the prices rise. The correct answer is (b) 5. In the model with adverse selection problem(lemons model, Akerlof) which of the following will not solve the problem (a). Price fixing by the government (b) Warranties (c). Repeated interaction between buyer and sellers (d). Mechanical inspection by the buyer from an expert who cares about reputation In this case government has no more information than the private party which is uninformed. So unless the price is fixed by the government at the value of a lemon there would be no transaction as before. But if that is the case then the lemons problem persists. The other three are examples of screening and signaling so they can solve adverse selection.3. Consider an industry composed of 3 firms and facing demand: P(Q) = 1 – Q, where Q = q1 + q2 + q3.The three firms are identical, each producing using a plant that exhibits quadratic cost 2 2/1)( i i = qqC . What are the Cournot equilibrium quantity and prices? (a). 3/5,2/5 (b). 4/5,7/5 (c). 8/5, 6/5 (d). 2/5, 2/5 The only combination of price and quantity that satisfies the demand equation is (a). Others do not. 4. Consider the Salop’s circular city model. What happens to the prices charged by the firms in a symmetric equilibrium and the equilibrium number of firms as the transport costs rise (a). Rises, falls (B). Rises, rises (c). Falls, falls (d). Falls, rises The equilibrium price in a Salop’s circular city model is given to be * * n t cp += where / Ftn* = . Plugging back we have / Ftcp* += . Hence as the transport cost rises both the number of firms as well as the prices rise. The correct answer is (b) 5. In the model with adverse selection problem (lemons model, Akerlof) which of the following will not solve the problem (a). Price fixing by the government (b). Warranties (c). Repeated interaction between buyer and sellers (d). Mechanical inspection by the buyer from an expert who cares about reputation. In this case government has no more information than the private party which is uninformed. So unless the price is fixed by the government at the value of a lemon there would be no transaction as before. But if that is the case then the lemons problem persists. The other three are examples of screening and signaling so they can solve adverse selection