CAE 5 (2017)Ejercicio Inglés
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Continuous Assessment Exercise 5
1. A monopoly faces a market demand function: Q= 50-P
Its average total cost function is: ATC= (10/Q) + 25
a) Analyse what is the level of production to reach maximum benefit. Calculate if it
generates profits or losses and represent it
Reach the maximum benefit at MR=MC TR=(50-Q)Q= 50Q-Q2—> MR=50-2Q ATC=(10/Q+25)Q=10+25Q —> MC= 25 ATC 50-2Q=25—> 2Q=25—> Q=12.5 MC P=50-12.5= 37.5 TR-TC=( 12.5x37.5)-((10/12.5+25)x12.5)= 468.75-322.5= 146.25—> Profits MR b) If the government makes monopoly to apply the principle of perfect competition, compute the new equilibrium price, quantity sold and see if the monopolist obtains profits or losses? P=MC P=25 —> Q=50-25=25 TR-TC=(25x25)-((10/25+25)x25)= 625-635= -10—>Losses c) What should be the criterion imposed by the government to prevent the monopolist losses and be sustainable in the long term The criterion to follow to avoid getting in to losses is: P=ATC If we equalize P = ATC 50-Q=10/Q +25 Q2 -25Q+10=0 Q=24,6; then P=25,4 and BT=0 Delfina Andrade BAM B6 2. Two automobile companies must decide whether to invest in a new process. Suppose two options. The cells express the benefits (in miliards of euros) of the different options.
Which of these two situations is consistent with the prisoner's dilemma? (Try to identify the dominant strategies in each option) Option A Option B The dominant strategies, i.e. the best for one player regardless of what the other does, in the case of the option A are: - by TOYUTU, Invest - by NOSSUN, Invest The dominant strategies in the case of the option B are: - by TOYUTU, Not to Invest - by NOSSUN, Invest Therefore, the option A is a prisoner's dilemma example, because the dominant strategies lead to a worse outcome for both parties.