ECON 2103: Problem Set 8

Prof. Jog

Due: Thursday, April 28, 2016 in Class

Max. Points: 20

Problem # 1:

(10 Points)

Suppose TimberPond and JayB are the only two music labels (i.e. companies) around. Each of

them currently limits the number of new artists per year to 10. Each of their artist sells 200 songs

at $10/song.

Each label is capable of signing 20 artists per year. If one label increases the number of artists to

20 and the other doesn’t; the price of song drops to $3.50/song and each artist sells 300 songs.

If both labels increase the number of artists to 20, the price per song drops to $2.00 and each

artist sells 400 songs.

Based on this information, answer the following questions:

a. First of all, create a 2×2 matrix showing the options (strategies) available to each label. (Hint:

Look at the table below)

b. Calculate their revenues (payoffs) under each situation

c. If this game is played only ONCE, what will be the outcome? What will be the price of song?

d. If this game is repeated every year for long enough time in the future, what will be the

outcome? What will be the price of a song?

JAYB

TIMBERPOND

Problem # 2:

(7 Points)

For a certain small town, the table shows the demand schedule for water. Assume the

marginal cost of supplying water is constant at $4 per bottle for a firm in all the problems.

Price

$9

$8

$7

$6

$5

$4

$3

$2

Quantity

(bottles)

200

400

600

800

1000

1200

1400

1600

Total Revenue

Total Cost

ProfitECON 2103: Problem Set 8

Prof. Jog

a) First of all, fill in the remaining columns.

b) Suppose there are many identical firms supplying water such that each is a small fraction

of the market. Calculate the quantity supplied, price charged and profits earned.

c) Suppose now there are only two identical firms. They compete in price with each other.

i.e. the firm charging a lower price gets all the customers. What will be the outcome in

terms of quantity, price and profit in this case?

d) Suppose now the two firms compete in quantity. They decide to cooperate with each

other and act as if they were a monopolist. What will be the quantity supplied, price

charged and profits earned by each firm?

Problem #3:

(3 Points)

Is NCAA an illegal cartel?

Read the following article/listen to the story:

http://www.npr.org/sections/money/2014/10/31/360176715/episode-579-is-the-ncaa-an-illegal-

cartel (Planet Money)

http://www.nytimes.com/2011/12/31/opinion/nocera-the-college-sports-cartel.html?_r=0

article)

Based on our discussion in class, do you think NCAA is an illegal cartel?

(NYT