Nama : Muhammad Andi Mubarok

No. Register : 46E19019

Kelas : Eks. A 46 A

Matakuliah : Managerial Economics (ME)

Dosen : Traheka Erdyas Bimanatya, S.E., M.Sc.

PROBLEM SET 3

Problem 3.1

[P.225, Baye-Prince] A firm has $1.5 million in sales, a Lerner index of 0.57, and a marginal
cost of $50, and competes against 800 other firms in its relevant market. a. What price does
this firm charge its costumers? b. By what factor does this firm mark up its price over
marginal cost? c. Do you think this firm enjoys much market power? Explain.

Answers:

a. $116.28. To see this, solve the Lerner index formula for P to obtain
1 1
P= ( 1−L ) MC =( 1−0.57 ) $ 50=$ 116.28 .
1 1
Since P=( ) MC , it follows that the markup factor is (
1−0.57 )
b. =2.33 .
1−L
That is, the price charged by the firm is 2.33 times the marginal cost of producing
the product.
c. The above calculations suggest price competition is not very hard and that the
firm enjoys market power. That means the firm has powerfull to determine price
in the market.

Problem 3.2

[P.264, Baye-Prince] A firm sells its product in a perfectly competitive market where other
firms charge a price of $90 per unit. The firm’s total costs are C(Q) = 50 + 10Q + 2Q2.

a. How much output should the firm produce in the short run?

b. What price should the firm charge in the short run?

c. What are the firm’s short-run profits?

Answers:

a. Set P = MC to get $90 = 10 + 4Q. Solve for Q to get Q = 20 units.

b. $90.
c. Revenues are R = ($90)(20) = $1800, costs are C = 50 + 10(20) + 2(20) 2 = $1050,
so profits are $750.
Problem 3.3

[P.333, Baye-Prince] Use the following payoff matrix for a simultaneous-move one-shot
game to answer the accompanying questions.

a. What is player 1’s optimal strategy? Why?

b. Determine player 1’s equilibrium payoff.

Answers:

a. Player 1’s optimal strategy is A. Player 1 does not have a dominant strategy.
However, by putting herself in her rival’s shoes, Player 1 should anticipate that
Player 2 will choose E (since E is Player 2’s dominant strategy). Player 1’s best
response to E is A.
b. Player 1’s equilibrium payoff is 18