Af1605 Introduction to Economics

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d) Nash equilibrium is an equilibrium in which each player takes the best possible action given the action of the other player.

For Danny, given that Paul’s action is to gain $10,000, Danny’s best possible action action should be make the same choice, so that he can gain $10,000 otherwise he will get $0 if he chooses different choices. Hence, given that Paul ‘s action is to give the other salesman $ 30,000, Danny’s best action is to make different choice that give oneself $10,000 bonus, so he can gain $40,000than $30,000.

For Paul, given that Danny’s action is to gain $10,000, Paul’s best possible action action should be make the same choice, so that he can gain $10,000 otherwise he will get $0 if he chooses different choices. Hence, given that Danny ‘s action is to give the other salesman $ 30,000, Paul’s best action is to make different choice that give oneself $10,000 bonus, so he can gain $40,000 than $30,000.

To conclude, Nash equilibrium for this game is for both players to make the best choice which is to give oneself $10,000 bonus.

Q6.1ai) Calculate the profit maximizing output of this monopoly.

Consider a monopoly facing the following demand and MC curves:

Demand is P=12-0.002Q and MC: MC=3+0.001Q. When the demand curve is P=a+b Q, MR curve will be MR=a-2b Q , so that MR = 12-2 x 0.002Q =MR=12-0.004Q.

The profit maximizing output is when the firm produces at an output level where marginal revenue equals to marginal cost. When marginal revenue equals to marginal cost, 12-0.004Q= 3+ 0.001Q, the profit maximizing output of this monopoly is 1800 of this monopoly.

aii) Calculate the socially efficient output level.

The socially efficient output level is when firm produces at an output level where marginal benefit equals to marginal cost. When marginal benefit equals to marginal cost,12-0.002Q = 3 + 0.001Q, the socially efficient output level is 3000 of this monopoly.

Aiii) The price when firm adopts profit maximizing is P=12-0.002Q= 12-0.002 X 1800 (from ai) = $6 while the price when firm produces at socially efficient output level is P=12-0.002Q=12-0.002 X 3000 (from aii) = $6. As $6 is smaller than $8, the monopoly unable to set at a higher price which is at $8 and government can also increase the outputs and increase the total social surplus when he sets at $6, so the price ceiling is set at $6.

b) To consider whether outdoor musical performance has the characteristics of ‘rival among the consumers when consuming the services’ and ‘excludable by the producer of the services’, there are two assumptions to prove that. Firstly, we can assume the case of audio entertainment. Rival means that its use by one person decreases the quantity available for someone else. No matter how many people watching the outdoor performance, people can still listen the music, this will not decrease the quantity available for someone else. Also, excludable means that it is possible to prevent someone from enjoying its benefit. We do not need to buy any tickets to watch outdoor musical performance, we can hear music when we standing in front of the music player playing the music. Everybody can enjoy the show. Therefore, it is non-rival and non-excludable for audio entertainment case.

The second case is the visual entertainment case. It is non-rival because there are no limited seats to watch the show, when there are more people watch the show, this will not affect the quantity available for others. On the other hand, it is excludable because when musical performance is great which can attract more people come to watch the show, this may block the views and people standing at the back may not be able to watch the stage and their benefit will be decrease. For visual

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