Practice Exercises for Intermediate Microeconomic Theory

416 Pages·2020·5.179 MB·English

by  Eric Dunaway, John C. Strandholm, Ana Espinola-Arredondo, Felix Munoz-Garcia

Practice Exercises for Intermediate
Microeconomic Theory
Tools and Step-by-Step Examples
Eric Dunaway, John C. Strandholm, Ana Espinola-Arredondo, and
Felix Muæoz-Garcia
The MIT Press
Cambridge, Massachusetts
London, England
c 2020 Massachusetts Institute of Technology
(cid:13)
All rights reserved. No part of this book may be reproduced in any form by any electronic or
mechanical means (including photocopying, recording, or information storage and retrieval)
without permission in writing from the publisher.
This book was set in LaTeX by the authors.
ISBN: 978-0-262-53985-2
Contents
Preface 11
Chapter 2 - Consumer Preferences and Utility 14
2.1 Solutions to Self-Assessment Exercises . . . . . . . . . . . . . . . . . . . . . . 14
Self-assessment exercise #2.1 . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Self-assessment exercise #2.2 . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Self-assessment exercise #2.3 . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Self-assessment exercise #2.4 . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Self-assessment exercise #2.5 . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Self-assessment exercise #2.6 . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Self-assessment exercise #2.7 . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Self-assessment exercise #2.8 . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Self-assessment exercise #2.9 . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Self-assessment exercise #2.10 . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Self-assessment exercise #2.11 . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Self-assessment exercise #2.12 . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Self-assessment exercise #2.13 . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Self-assessment exercise #2.14 . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Self-assessment exercise #2.15 . . . . . . . . . . . . . . . . . . . . . . . . . . 28
2.2 Solutions to End-of-Chapter Exercises . . . . . . . . . . . . . . . . . . . . . . 29
Exercise #2.1 - Indi⁄erence CurvesB . . . . . . . . . . . . . . . . . . . . . . 29
Exercise #2.3 - One Way or AnotherB . . . . . . . . . . . . . . . . . . . . . 35
Exercise #2.5 - Cobb-DouglasA . . . . . . . . . . . . . . . . . . . . . . . . . 37
Exercise #2.7 - Perfect SubstitutesA . . . . . . . . . . . . . . . . . . . . . . 37
Exercise #2.9 - Increasing TransformationsB . . . . . . . . . . . . . . . . . . 38
Exercise #2.11 - Finding Properties(cid:150)IIC . . . . . . . . . . . . . . . . . . . . 40
Exercise #2.13 - Finding Properties(cid:150)IVB . . . . . . . . . . . . . . . . . . . . 42
Exercise #2.15 - Guilty PreferencesB . . . . . . . . . . . . . . . . . . . . . . 43
Exercise #2.17 - Protein PreferencesA . . . . . . . . . . . . . . . . . . . . . . 45
Exercise #2.19 - Eating PizzaA . . . . . . . . . . . . . . . . . . . . . . . . . 46
Chapter 3 - Consumer Choice 47
3.1 Solutions to Self-Assessment Exercises . . . . . . . . . . . . . . . . . . . . . . 47
Self-assessment exercise #3.1 . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Self-assessment exercise #3.2 . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Self-assessment exercise #3.3 . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Self-assessment exercise #3.4 . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Self-assessment exercise #3.5 . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Self-assessment exercise #3.6 . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Self-assessment exercise #3.7 . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Self-assessment exercise #3.8 . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Self-assessment exercise #3.9 . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Self-assessment exercise #3.10 . . . . . . . . . . . . . . . . . . . . . . . . . . 59
3.2 Solutions to End-of-Chapter Exercises . . . . . . . . . . . . . . . . . . . . . . 59
1
Exercise #3.1 - Budget LineA . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Exercise #3.3 - Composite GoodA . . . . . . . . . . . . . . . . . . . . . . . . 62
Exercise #3.5 - Expenditure FunctionA . . . . . . . . . . . . . . . . . . . . . 65
Exercise #3.7 - Cobb-Douglas(cid:150)IA . . . . . . . . . . . . . . . . . . . . . . . . 66
Exercise #3.9 - Cobb-Douglas(cid:150)IIIC . . . . . . . . . . . . . . . . . . . . . . . 67
Exercise #3.11 - Di⁄erent RelationshipsC . . . . . . . . . . . . . . . . . . . . 68
Exercise #3.13 - Perfect Complements(cid:150)IA . . . . . . . . . . . . . . . . . . . 69
Exercise #3.15 - Expenditure Minimization ProblemA . . . . . . . . . . . . . 70
Exercise #3.17 - Perfect Complements(cid:150)IIB . . . . . . . . . . . . . . . . . . . 71
Exercise #3.19 - Utility MaximizationB . . . . . . . . . . . . . . . . . . . . . 72
Chapter 4 - Substitution and Income E⁄ects 74
4.1 Solutions to Self-Assessment Exercises . . . . . . . . . . . . . . . . . . . . . . 74
Self-assessment exercise #4.1 . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Self-assessment exercise #4.2 . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Self-assessment exercise #4.3 . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Self-assessment exercise #4.4 . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Self-assessment exercise #4.5 . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Self-assessment exercise #4.6 . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Self-assessment exercise #4.7 . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Self-assessment exercise #4.8 . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Self-assessment exercise #4.9 . . . . . . . . . . . . . . . . . . . . . . . . . . 81
4.2 Solutions to End-of-Chapter Exercises . . . . . . . . . . . . . . . . . . . . . . 83
Exercise #4.1 - Deriving Functions(cid:150)IA . . . . . . . . . . . . . . . . . . . . . 83
Exercise #4.3 - Quasilinear Utility(cid:150)IB . . . . . . . . . . . . . . . . . . . . . . 86
Exercise #4.5 - Decomposition BundlesB . . . . . . . . . . . . . . . . . . . . 88
Exercise #4.7 - Income E⁄ectsA . . . . . . . . . . . . . . . . . . . . . . . . . 93
Exercise #4.9 - Linear DemandA . . . . . . . . . . . . . . . . . . . . . . . . 93
Exercise #4.11 - Income Elasticity(cid:150)IB . . . . . . . . . . . . . . . . . . . . . . 94
Exercise #4.13 - Perfect ComplementsB . . . . . . . . . . . . . . . . . . . . 95
Exercise #4.15 - Deriving Functions(cid:150)IIA . . . . . . . . . . . . . . . . . . . . 99
Exercise #4.17 - Income Elasticity(cid:150)IIA . . . . . . . . . . . . . . . . . . . . . 101
Exercise #4.19 - Gi⁄en Good?B . . . . . . . . . . . . . . . . . . . . . . . . . 102
Chapter 5 - Measuring Welfare Changes 103
5.1 Solutions to Self-Assessment Exercises . . . . . . . . . . . . . . . . . . . . . . 103
Self-assessment exercise #5.1 . . . . . . . . . . . . . . . . . . . . . . . . . . 103
Self-assessment exercise #5.2 . . . . . . . . . . . . . . . . . . . . . . . . . . 103
Self-assessment exercise #5.3 . . . . . . . . . . . . . . . . . . . . . . . . . . 103
Self-assessment exercise #5.4 . . . . . . . . . . . . . . . . . . . . . . . . . . 105
Self-assessment exercise #5.5 . . . . . . . . . . . . . . . . . . . . . . . . . . 106
Self-assessment exercise #5.6 . . . . . . . . . . . . . . . . . . . . . . . . . . 108
Self-assessment exercise #5.7 . . . . . . . . . . . . . . . . . . . . . . . . . . 109
5.2 Solutions to End-of-Chapter Exercises . . . . . . . . . . . . . . . . . . . . . . 109
Exercise #5.1 - Changes in CSA . . . . . . . . . . . . . . . . . . . . . . . . . 109
Exercise #5.3 - CS and Changing PricesA . . . . . . . . . . . . . . . . . . . 110
2
Exercise #5.5 - CS and Nonlinear Demand(cid:150)IA . . . . . . . . . . . . . . . . . 111
Exercise #5.7 - Calculating CVB . . . . . . . . . . . . . . . . . . . . . . . . 111
Exercise #5.9 - CV with Cobb-Douglas Utility FunctionB . . . . . . . . . . . 112
Exercise #5.11 - CV with General Price ChangeC . . . . . . . . . . . . . . . 113
Exercise #5.13 - EV with Cobb-Douglas Demand(cid:150)IIB . . . . . . . . . . . . . 115
Exercise #5.15 - EV with Di⁄erent IncomeA . . . . . . . . . . . . . . . . . . 115
Exercise #5.17 - CS, CV, and EV with No Income E⁄ects(cid:150)IB . . . . . . . . 116
Exercise #5.19 - Alternative Representation of CVB . . . . . . . . . . . . . . 118
Exercise #5.21 - Alternative Representation of EVB . . . . . . . . . . . . . . 120
Chapter 6 - Choice under Uncertainty 124
6.1 Solutions to Self-Assessment Exercises . . . . . . . . . . . . . . . . . . . . . . 124
Self-assessment exercise #6.1 . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Self-assessment exercise #6.2 . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Self-assessment exercise #6.3 . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Self-assessment exercise #6.4 . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Self-assessment exercise #6.5 . . . . . . . . . . . . . . . . . . . . . . . . . . 126
Self-assessment exercise #6.6 . . . . . . . . . . . . . . . . . . . . . . . . . . 126
Self-assessment exercise #6.7 . . . . . . . . . . . . . . . . . . . . . . . . . . 126
Self-assessment exercise #6.8 . . . . . . . . . . . . . . . . . . . . . . . . . . 127
6.2 Solutions to End-of-Chapter Exercises . . . . . . . . . . . . . . . . . . . . . . 128
Exercise #6.1 - Expected UtilityA . . . . . . . . . . . . . . . . . . . . . . . . 128
Exercise #6.3 - EV and Variance(cid:150)IIB . . . . . . . . . . . . . . . . . . . . . . 128
Exercise #6.5 - Expected Utility(cid:150)IIA . . . . . . . . . . . . . . . . . . . . . . 129
Exercise #6.7 - Risk AversionB . . . . . . . . . . . . . . . . . . . . . . . . . 130
Exercise #6.9 - Risk LovingB . . . . . . . . . . . . . . . . . . . . . . . . . . 131
Exercise #6.11 - Risk NeutralityB . . . . . . . . . . . . . . . . . . . . . . . . 132
Exercise #6.13 - Contracting an IllnessB . . . . . . . . . . . . . . . . . . . . 133
Exercise #6.15 - Not Purchasing Full InsuranceB . . . . . . . . . . . . . . . 135
Exercise #6.17 - Arrow-Pratt Coe¢ cient(cid:150)IIB . . . . . . . . . . . . . . . . . . 136
Exercise #6.19 - Prospect Theory(cid:150)IB . . . . . . . . . . . . . . . . . . . . . . 137
Exercise #6.21 - GamblingA . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
Chapter 7 - Production Functions 139
7.1 Solutions to Self-Assessment Exercises . . . . . . . . . . . . . . . . . . . . . . 139
Self-assessment exercise #7.1 . . . . . . . . . . . . . . . . . . . . . . . . . . 139
Self-assessment exercise #7.2 . . . . . . . . . . . . . . . . . . . . . . . . . . 139
Self-assessment exercise #7.3 . . . . . . . . . . . . . . . . . . . . . . . . . . 140
Self-assessment exercise #7.4 . . . . . . . . . . . . . . . . . . . . . . . . . . 140
Self-assessment exercise #7.5 . . . . . . . . . . . . . . . . . . . . . . . . . . 140
Self-assessment exercise #7.6 . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Self-assessment exercise #7.7 . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Self-assessment exercise #7.8 . . . . . . . . . . . . . . . . . . . . . . . . . . 142
Self-assessment exercise #7.9 . . . . . . . . . . . . . . . . . . . . . . . . . . 142
Self-assessment exercise #7.10 . . . . . . . . . . . . . . . . . . . . . . . . . . 142
Self-assessment exercise #7.11 . . . . . . . . . . . . . . . . . . . . . . . . . . 143
3
Self-assessment exercise #7.12 . . . . . . . . . . . . . . . . . . . . . . . . . . 144
Self-assessment exercise #7.13 . . . . . . . . . . . . . . . . . . . . . . . . . . 144
7.2 Solutions to End-of-Chapter Exercises . . . . . . . . . . . . . . . . . . . . . . 144
Exercise #7.1 - Properties of Production FunctionsB . . . . . . . . . . . . . 144
Exercise #7.3 - Where the MP and AP Curves CrossA . . . . . . . . . . . . 146
Exercise #7.5 - MP and Changing CapitalB . . . . . . . . . . . . . . . . . . 147
Exercise #7.7 - Linear Production and MRTSA . . . . . . . . . . . . . . . . 148
Exercise #7.9 - Returns to Scale(cid:150)IA . . . . . . . . . . . . . . . . . . . . . . . 148
Exercise #7.11 - Decreasing Marginal ReturnsA . . . . . . . . . . . . . . . . 149
Exercise #7.13 - Choosing ProductionA . . . . . . . . . . . . . . . . . . . . . 149
Exercise #7.15 - CES Production Function and Marginal ProductsB . . . . . 150
Exercise #7.17 - Choosing Factors of ProductionB . . . . . . . . . . . . . . . 150
Exercise #7.19 - Comparing MRTSC . . . . . . . . . . . . . . . . . . . . . . 151
Chapter 8 - Cost Minimization 153
8.1 Solutions to Self-Assessment Exercises . . . . . . . . . . . . . . . . . . . . . . 153
Self-assessment exercise #8.1 . . . . . . . . . . . . . . . . . . . . . . . . . . 153
Self-assessment exercise #8.2 . . . . . . . . . . . . . . . . . . . . . . . . . . 153
Self-assessment exercise #8.3 . . . . . . . . . . . . . . . . . . . . . . . . . . 154
Self-assessment exercise #8.4 . . . . . . . . . . . . . . . . . . . . . . . . . . 155
Self-assessment exercise #8.5 . . . . . . . . . . . . . . . . . . . . . . . . . . 156
Self-assessment exercise #8.6 . . . . . . . . . . . . . . . . . . . . . . . . . . 157
Self-assessment exercise #8.7 . . . . . . . . . . . . . . . . . . . . . . . . . . 157
Self-assessment exercise #8.8 . . . . . . . . . . . . . . . . . . . . . . . . . . 158
Self-assessment exercise #8.9 . . . . . . . . . . . . . . . . . . . . . . . . . . 159
Self-assessment exercise #8.10 . . . . . . . . . . . . . . . . . . . . . . . . . . 159
Self-assessment exercise #8.11 . . . . . . . . . . . . . . . . . . . . . . . . . . 159
Self-assessment exercise #8.12 . . . . . . . . . . . . . . . . . . . . . . . . . . 160
Self-assessment exercise #8.13 . . . . . . . . . . . . . . . . . . . . . . . . . . 160
8.2 Solutions to End-of-Chapter Exercises . . . . . . . . . . . . . . . . . . . . . . 161
Exercise #8.1 - Cost Minimization for Cobb-DouglasB . . . . . . . . . . . . 161
Exercise #8.3 - Properties of a Cost FunctionB . . . . . . . . . . . . . . . . 164
Exercise #8.5 - CMP for Cobb-Douglas Production(cid:150)IC . . . . . . . . . . . . 165
Exercise #8.7 - Explicit and Implicit CostsA . . . . . . . . . . . . . . . . . . 168
Exercise #8.9 - CMP with Cobb-Douglas Production(cid:150)IIB . . . . . . . . . . . 168
Exercise #8.11 - Cobb-Douglas Production and Input DemandB . . . . . . . 169
Exercise #8.13 - Short-Run Cobb-Douglas CostsB . . . . . . . . . . . . . . . 170
Exercise #8.15 - Substitutes in ProductionB . . . . . . . . . . . . . . . . . . 173
Exercise #8.17 - Economies of Scale(cid:150)IA . . . . . . . . . . . . . . . . . . . . . 174
Exercise #8.19 - Economies of ScopeA . . . . . . . . . . . . . . . . . . . . . 174
Exercise #8.21 - Experience Elasticity(cid:150)IIA . . . . . . . . . . . . . . . . . . . 175
Chapter 9 - Partial and General Equilibrium 176
9.1 Solutions to Self-Assessment Exercises . . . . . . . . . . . . . . . . . . . . . . 176
Self-assessment exercise #9.1 . . . . . . . . . . . . . . . . . . . . . . . . . . 176
Self-assessment exercise #9.2 . . . . . . . . . . . . . . . . . . . . . . . . . . 176
4
Self-assessment exercise #9.3 . . . . . . . . . . . . . . . . . . . . . . . . . . 177
Self-assessment exercise #9.4 . . . . . . . . . . . . . . . . . . . . . . . . . . 177
Self-assessment exercise #9.5 . . . . . . . . . . . . . . . . . . . . . . . . . . 178
Self-assessment exercise #9.6 . . . . . . . . . . . . . . . . . . . . . . . . . . 179
Self-assessment exercise #9.7 . . . . . . . . . . . . . . . . . . . . . . . . . . 180
Self-assessment exercise #9.8 . . . . . . . . . . . . . . . . . . . . . . . . . . 180
Self-assessment exercise #9.9 . . . . . . . . . . . . . . . . . . . . . . . . . . 182
Self-assessment exercise #9.10 . . . . . . . . . . . . . . . . . . . . . . . . . . 182
9.2 Solutions to End-of-Chapter Exercises . . . . . . . . . . . . . . . . . . . . . . 183
Exercise #9.1 - Identifying Perfectly Competitive MarketsA . . . . . . . . . . 183
Exercise #9.3 - Long-Run Equilibrium and SubsidiesB . . . . . . . . . . . . 183
Exercise #9.5 - Perfectly Competitive Equilibrium(cid:150)IIA . . . . . . . . . . . . 187
Exercise #9.7 - Shutdown Price and Short-Run SupplyA . . . . . . . . . . . 187
Exercise #9.9 - Finding Aggregate Supply and EquilibriumA . . . . . . . . . 189
Exercise #9.11 - Calculating Producer SurplusA . . . . . . . . . . . . . . . . 190
Exercise #9.13 - Pro(cid:133)t versus Producer SurplusB . . . . . . . . . . . . . . . 191
Exercise #9.15 - General Equilibrium(cid:150)IB . . . . . . . . . . . . . . . . . . . . 191
Exercise #9.17 - E¢ ciency in General EquilibriumB . . . . . . . . . . . . . . 192
Exercise #9.19 - Second Welfare TheoremC . . . . . . . . . . . . . . . . . . 194
Exercise #9.21 - First Welfare Theorem with External E⁄ectsC . . . . . . . 196
Chapter 10 - Monopoly 201
10.1 Solutions to Self-Assessment Exercises . . . . . . . . . . . . . . . . . . . . . . 201
Self-assessment exercise #10.1 . . . . . . . . . . . . . . . . . . . . . . . . . . 201
Self-assessment exercise #10.2 . . . . . . . . . . . . . . . . . . . . . . . . . . 202
Self-assessment exercise #10.3 . . . . . . . . . . . . . . . . . . . . . . . . . . 205
Self-assessment exercise #10.4 . . . . . . . . . . . . . . . . . . . . . . . . . . 206
Self-assessment exercise #10.5 . . . . . . . . . . . . . . . . . . . . . . . . . . 206
Self-assessment exercise #10.6 . . . . . . . . . . . . . . . . . . . . . . . . . . 206
Self-assessment exercise #10.7 . . . . . . . . . . . . . . . . . . . . . . . . . . 207
Self-assessment exercise #10.8 . . . . . . . . . . . . . . . . . . . . . . . . . . 208
Self-assessment exercise #10.9 . . . . . . . . . . . . . . . . . . . . . . . . . . 209
Self-assessment exercise #10.10 . . . . . . . . . . . . . . . . . . . . . . . . . 209
10.2 Solutions to End-of-Chapter Exercises . . . . . . . . . . . . . . . . . . . . . . 211
Exercise #10.1 - Monopoly Equilibrium-Linear CostsB . . . . . . . . . . . . 211
Exercise #10.3 - Maximizing Revenue versus Pro(cid:133)tA . . . . . . . . . . . . . 213
Exercise #10.5 - Regulating a Natural MonopolyB . . . . . . . . . . . . . . . 215
Exercise #10.7 - Two Parts of Marginal RevenueA . . . . . . . . . . . . . . . 217
Exercise #10.9 - Factors of a High Monopoly PriceB . . . . . . . . . . . . . . 218
Exercise #10.11 - Monopoly with General Linear DemandC . . . . . . . . . . 218
Exercise #10.13 - Multiplant Monopoly(cid:150)IB . . . . . . . . . . . . . . . . . . . 219
Exercise #10.15 - Multiproduct MonopolyC . . . . . . . . . . . . . . . . . . 220
Exercise #10.17 - Advertising-to-Sales RatioA . . . . . . . . . . . . . . . . . 222
Exercise #10.19 - Identify a MonopsonyA . . . . . . . . . . . . . . . . . . . . 222
Exercise #10.21 - Monopsony(cid:150)Two InputsB . . . . . . . . . . . . . . . . . . 222
5
Chapter 11 - Price Discrimination and Bundling 224
11.1 Solutions to Self-Assessment Exercises . . . . . . . . . . . . . . . . . . . . . . 224
Self-assessment exercise #11.1 . . . . . . . . . . . . . . . . . . . . . . . . . . 224
Self-assessment exercise #11.2 . . . . . . . . . . . . . . . . . . . . . . . . . . 224
Self-assessment exercise #11.3 . . . . . . . . . . . . . . . . . . . . . . . . . . 226
Self-assessment exercise #11.4 . . . . . . . . . . . . . . . . . . . . . . . . . . 226
11.2 Solutions to End-of-Chapter Exercises . . . . . . . . . . . . . . . . . . . . . . 230
Exercise #11.1 - Price Discrimination with Di⁄erent DemandsB . . . . . . . 230
Exercise #11.3 - Implementing Price DiscriminationA . . . . . . . . . . . . . 231
Exercise #11.5 - When to Price DiscriminateB . . . . . . . . . . . . . . . . . 232
Exercise #11.7 - Willingness to Price DiscriminateB . . . . . . . . . . . . . . 234
Exercise #11.9 - Deciding When to Withdraw from a MarketB . . . . . . . . 235
Exercise #11.11 - Second-Degree Price DiscriminationA . . . . . . . . . . . . 237
Exercise #11.13 - Second-Degree Price Discrimination with Three BlocksC . 239
Exercise #11.15 - Bundling PricesA . . . . . . . . . . . . . . . . . . . . . . . 240
Exercise #11.17 - Bundling-IIB . . . . . . . . . . . . . . . . . . . . . . . . . 241
Exercise #11.19 - Bundling-IIIB . . . . . . . . . . . . . . . . . . . . . . . . . 244
Chapter 12 - Simultaneous-Move Games 247
12.1 Solutions to Self-Assessment Exercises . . . . . . . . . . . . . . . . . . . . . . 247
Self-assessment exercise #12.1 . . . . . . . . . . . . . . . . . . . . . . . . . . 247
Self-assessment exercise #12.2 . . . . . . . . . . . . . . . . . . . . . . . . . . 247
Self-assessment exercise #12.3 . . . . . . . . . . . . . . . . . . . . . . . . . . 248
Self-assessment exercise #12.4 . . . . . . . . . . . . . . . . . . . . . . . . . . 249
Self-assessment exercise #12.5 . . . . . . . . . . . . . . . . . . . . . . . . . . 250
Self-assessment exercise #12.6 . . . . . . . . . . . . . . . . . . . . . . . . . . 250
Self-assessment exercise #12.7 . . . . . . . . . . . . . . . . . . . . . . . . . . 251
Self-assessment exercise #12.8 . . . . . . . . . . . . . . . . . . . . . . . . . . 252
Self-assessment exercise #12.9 . . . . . . . . . . . . . . . . . . . . . . . . . . 253
Self-assessment exercise #12.10 . . . . . . . . . . . . . . . . . . . . . . . . . 254
12.2 Solutions to End-of-Chapter Exercises . . . . . . . . . . . . . . . . . . . . . . 256
Exercise #12.1 - Strict DominanceA . . . . . . . . . . . . . . . . . . . . . . . 256
Exercise #12.3 - Strict Dominance (cid:150)Some BiteB . . . . . . . . . . . . . . . 257
Exercise #12.5 - Prisoner(cid:146)s DilemmaB . . . . . . . . . . . . . . . . . . . . . 259
Exercise #12.7 - Weak DominanceA . . . . . . . . . . . . . . . . . . . . . . . 259
Exercise #12.9 - Weak Dominance(cid:150)IIIB . . . . . . . . . . . . . . . . . . . . . 260
Exercise #12.11 - Nash Equilibrium in a 3x3 MatrixB . . . . . . . . . . . . . 263
Exercise #12.13 - Nash Equilibrium in the Split(cid:150)Steal GameB . . . . . . . . 264
Exercise #12.15 - Rock, Paper, Scissors(cid:150)IA . . . . . . . . . . . . . . . . . . . 265
Exercise #12.17 - Charitable ContributionsB . . . . . . . . . . . . . . . . . . 267
Exercise #12.19 - Finding msNE(cid:150)Coordination GameB . . . . . . . . . . . . 268
Exercise #12.21 - Penalty KicksA . . . . . . . . . . . . . . . . . . . . . . . . 270
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Chapter 13 - Sequential and Repeated Games 272
13.1 Solutions to Self-Assessment Exercises . . . . . . . . . . . . . . . . . . . . . . 272
Self-assessment exercise #13.1 . . . . . . . . . . . . . . . . . . . . . . . . . . 272
Self-assessment exercise #13.2 . . . . . . . . . . . . . . . . . . . . . . . . . . 273
Self-assessment exercise #13.3 . . . . . . . . . . . . . . . . . . . . . . . . . . 274
Self-assessment exercise #13.4 . . . . . . . . . . . . . . . . . . . . . . . . . . 276
13.2 Solutions to End-of-Chapter Exercises . . . . . . . . . . . . . . . . . . . . . . 278
Exercise #13.1 - Backward Induction(cid:150)IA . . . . . . . . . . . . . . . . . . . . 278
Exercise #13.3 - Backward Induction(cid:150)IIIB . . . . . . . . . . . . . . . . . . . 281
Exercise #13.5 - Backward Induction(cid:150)VB . . . . . . . . . . . . . . . . . . . . 284
Exercise #13.7 - Battle of the Sexes GameA . . . . . . . . . . . . . . . . . . 288
Exercise #13.9 - Anticoordination GameA . . . . . . . . . . . . . . . . . . . 293
Exercise #13.11 - Complementary PricingB . . . . . . . . . . . . . . . . . . 298
Exercise #13.13 - Centipede GameC . . . . . . . . . . . . . . . . . . . . . . 304
Exercise #13.15 - Repeated DilemmasB . . . . . . . . . . . . . . . . . . . . . 310
Exercise #13.17 - Alternative TriggersB . . . . . . . . . . . . . . . . . . . . . 311
Exercise #13.19 - Temporary PunishmentsC . . . . . . . . . . . . . . . . . . 316
Exercise #13.21 - Punishment SizeB . . . . . . . . . . . . . . . . . . . . . . 318
Exercise #13.23 - Rock, Paper, Scissors(cid:150)IIB . . . . . . . . . . . . . . . . . . 319
Chapter 14 - Imperfect Competition 320
14.1 Solutions to Self-Assessment Exercises . . . . . . . . . . . . . . . . . . . . . . 320
Self-assessment exercise #14.1 . . . . . . . . . . . . . . . . . . . . . . . . . . 320
Self-assessment exercise #14.2 . . . . . . . . . . . . . . . . . . . . . . . . . . 321
Self-assessment exercise #14.3 . . . . . . . . . . . . . . . . . . . . . . . . . . 323
Self-assessment exercise #14.4 . . . . . . . . . . . . . . . . . . . . . . . . . . 325
Self-assessment exercise #14.5 . . . . . . . . . . . . . . . . . . . . . . . . . . 326
Self-assessment exercise #14.6 . . . . . . . . . . . . . . . . . . . . . . . . . . 327
Self-assessment exercise #14.7 . . . . . . . . . . . . . . . . . . . . . . . . . . 328
Self-assessment exercise #14.8 . . . . . . . . . . . . . . . . . . . . . . . . . . 329
Self-assessment exercise #14.9 . . . . . . . . . . . . . . . . . . . . . . . . . . 329
14.2 Solutions to End-of-Chapter Exercises . . . . . . . . . . . . . . . . . . . . . . 330
Exercise #14.1 - Her(cid:133)ndahl-Hirschman IndexA . . . . . . . . . . . . . . . . . 330
Exercise #14.3 - Properties of the Best Response FunctionB . . . . . . . . . 331
Exercise #14.5 - Symmetric CournotA . . . . . . . . . . . . . . . . . . . . . 332
Exercise #14.7 - Cournot with Asymmetric Fixed CostsB . . . . . . . . . . . 334
Exercise #14.9 - Cournot with Three FirmsC . . . . . . . . . . . . . . . . . . 336
Exercise #14.11 - Finitely Repeated Grim-Trigger StrategyB . . . . . . . . . 338
Exercise #14.13 - Collusion with Delayed DetectionB . . . . . . . . . . . . . 339
Exercise #14.15 - Colluding BarbecueB . . . . . . . . . . . . . . . . . . . . . 340
Exercise #14.17 - Properties of the Stackelberg EquilibriumA . . . . . . . . . 343
Exercise #14.19 - Cournot versus StackelbergB . . . . . . . . . . . . . . . . . 344
Exercise #14.21 - Product Di⁄erentiationA . . . . . . . . . . . . . . . . . . . 346
Exercise #14.23 - Stackelberg Prices with Homogeneous GoodsA . . . . . . . 347
Exercise #14.25 - Reconciling Bertrand and Cournot through CapacityC . . 348
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