Assume your production technology is described by the total cost function

NOTE:You must show and explain your work

1.
Monopoly:
You are the
manager of a business in a monopoly market with the following inverse demand
function
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In addition,
assume your production technology is described by the total cost function
C(q) = 500+ 10q

a)
Determine the
optimal quantity to produce (qM), the price you should charge for
your product (pM), and compute the profit of your business.
b)
Provide
an intuitive explanation of market power. What is market power? How do we
measure the market power of a business? Compute the market power of your
business.

2.
Game Theory:
Firm 1 and Firm 2
compete in an industry and must decide whether to introduce an upgrade to their
existing products.The nature of the strategic interaction is described by the
game box, where (Y) means “upgrade” and (N) means “do not upgrade”.The upgrade
is costly and may or may not be a good business decision.
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a)
Assume Firm 1 and
Firm 2 move simultaneously. Derive the NASH equilibrium of this game.
b)
Assume Firm 1 and
Firm 2 move sequentially.In particular, Firm 1 makes the initial move and decides whether
to introduce the upgrade. Then, Firm 2 observes the decision of Firm 1 and
decides whether to introduce the upgrade.
Draw the game tree representation of this game and determine the subgame
perfect NASH equilibrium.

3.
Pricing
Strategies:
A business can
produce its product in different versions: Version A has a basic design and a
lower cost and Version B has an upgraded design and a higher cost of
production. The business knows there are
different types of customers, “High” demand (H) and “Low” demand (L), but
cannot separate the different types of customers. The number of customers of
each type and the maximum each type is willing to pay for the different
versions of the product are illustrated in the table. In addition, the table
gives the marginal cost of production for each version of the product.

Number

Type

Version A

Version B

50

H

30

45

100

L

20

25

Marginal Cost

10

20

a)
Assume the
business offers the product in Version A only. Determine the optimal price (.png”>) and compute the profit of the
business.
b)
Assume the
business offers the product in Version A and Version B. Determine the optimal
prices (.png”> and.png”>) and compute the profit of the
business.

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