Seminar 1:

ABC raised its price from $10 to $12 a case (wholesale). As a result, sales dropped
from 10 500 to 8 100 (in units).
Based on your estimate of the demand elasticity, what percent change in sales
would you predict if prices were cut from $10 to $9? What demand level would this
correspond to?

Solution:

el=( <q> / <p> ) x ( p/ q ) = (10500-8100) / (10-12) * (12/8100) = -1.77

(approximate elasticity for discrete changes)

Price 10->9$ --> 10% decrease

Q9 = 10500 (1+ (-1.77) * (-10%) = 12358 (the value is approximate due to using
Q9 = Q10 (1+ el * %change) simplified calculation options)
OR for more accurate calculations:
el= (<log q>) / (<log p>) = (log10500 - log8100) / (log10/12)= -1,42 (constant el.)
-1,42= (log10500 - log q9) / log 10/9
Then log q9= 1,42 log10/9 +log10500 = 4,086
q9= exp(4,086) = 12195
Seminar 2:

Qd = 120 - 1.5p, Qs = –20 + 2p. 120 - 1.5p=-20+2p p=40, q=60

Suppose that there is an increase in demand by 10% (that is, for each price, demand
is now 10% greater than it was before the price increase).

(b) Determine the new demand curve;

(c) Determine the change in equilibrium quantity;
New Qd= 1.1 (120 - 1.5p) = 132 - 1.65p
New equilibrium: 132 - 1,65p= -20+ 2p, p=152/2,65=41,64, q=63,29

Suppose there is an increase in the cost of material --> effect on price of supply
Qs1 = –20 + 2p, p1=0.5+10 , then new p= 1,1*(0,5Q+ 10)= 0.55Q + 11
Then new Qs=(-11+p) / 0.55= -20 + 1,82p
New equilibrium: 120 - 1.5p=-20 + 1,82p then p=140/3,32 = 42,17, and q=56,74
EX: Sales tax on consumers/ buyers: then p (from Qd) = p1 - tax$
Sales tax on sellers: p (from Qs) = p + tax$
Seminar 3:

Monopolist with D = 120 – 2 p and MC = 40. Determine profit, consumer surplus, and
social welfare in the following two cases:
1. single-price monopolist;
2. perfect price discrimination

D= 120- 2p, then p=60- 0.5q

A) R=pq=60q - 0.5q^2
MR=MC
60-q=40, then q*=20, p*= 60-20/2= 50
П = R-C= (p-c)q= (50 - 40) x 20= 200
Consumer Surplus = CS = (p(if q=0) - p*) x q* x 1/2 = (60 - 50) x 20 x 1/2= 100
Producer Surplus = PS = П (+ fixed costs if there are any)
Social Welfare= CS+ PS = 100+200=300

B) p=60 - 0.5q
Perfect price discrimination --> to get max q: p=MC
60 - 0.5q = 40,
q*= 40, p*= 60 - 40/2 = 40
In this scenario company takes all the surplus above equilibrium:
CS= 0
PS = 1/2 (p (if q=0) - MC) x q* =(60-40) 40 = 400
Social Welfare = CS+PS= 400

It looks as if price discrimination has increased total social welfare. But in fact all
profit now goes to firms, they are better off, yet nothing goes to customers (CS=0)
Seminar 4:

2 firms, CS and LC, make identical goods, sell them in the same market.
The demand in the market is Q = 1200 – P.
Once a firm has built capacity, it can produce up to its capacity each period with a
marginal cost of MC = 0.
Building a unit of capacity costs 2400 (for either CS or LC) and a unit of capacity
lasts 4 years. The interest rate is zero.
Once production occurs each period, the price in the market adjusts to the level at
which all production is sold. (In other words, these firms engage in quantity
competition, not price competition.)
If CS knew that LC were going to build 100 units of capacity, how much capacity
would CS want to build?

Q=1200 - P, MC=0
4year cost=2400, Cournot Competition
q (Firm2) =100 units, q (firm1) -?

MC for 1 year = 2400/4= 600 $/year

q1+q2=Q=1200 - p
then q1= 1200-p-q2, q2=100 (given)
q1=1100 - p --> p= 1100-q
MR= (pq)’ = 1100 - 2q1 = 600 =MC
q1=500/2= 250
q1= 250 is the best response to what firm2 decided on capacity of q2=100
Cournot with increasing MC. Consider a duopoly for a homogenous product with
demand Q=10 – P/2. Each firm's cost function is C = 10 + q(q + 1).
(a) Determine the values of the Cournot equilibrium.
(b) Re-compute the equilibrium values assuming that one of the firms – say, firm 2 –
has a cost function given byC=10+q(q+ 2).

a) Q= 10 - 1/2 P then P=20-2Q,

Q=q1+q2
П1= R-C= pq1 - C = q1(20 - 2q1 - 2q2) --- (10+q1^2+q1)
First order derivative П’(q1)= 1(20-2q1-2q2) +q1 x (-2) - (2q1 +1 )
q1=q2=q then the same П’=20 - 4q -2q - 2q - 1 = 19-8q = 0
q=19/8= 2,375, p=20-2x2q=10.5

b) Firm1: 20 - 2(q1+q2) - 2q1 - (2q1 +1)=0 (from part 1)

Firm2: 20 - 2(q1+q2) - 2q2 - (2q2 + 2)=0
19 - 6q1 -2q2 =0
18 - 2q1 -6q2=0 /x-3
-54+6q1+18q2= 0

Sum 1st and last equation: 35=16q2, q2=2,1875

q1=9-3q2= 2,4375
Calibration Class:

How will exchange rate devaluation for India affect French profitability?
Q fr =400-50p
MC fr =2 eur, MC ind = 150 rupees =3 eur (1eur =50 Rupees)

1) If Fr puts the price 3eur =MC(ind) it can steal the customers then:
П fr = (p-c) Q = (3-2) (400 - 50x3)
2) -20% devaluation --> 1eur=60 Rup, then new MCind=150/60=2,5 eur
П fr = (p-c) Q = (2,5-2) (400 - 50x2,5)= 137,5
3) percentage impact: (250-137.5) / 250 = 45%
20% devaluation (change in exchange rate of rival) has lead to 45% drop in profits of
the French firm

EX:
1. Social Optimum (socially optimal level) : D=S+C(cost of externality)
S+c: q=p-e (it can be written c instead of e)
D: q=1-p (given info)
Summing these two equations: 2q = p - e + 1 - p = 1- e
e=q (given info) then 2q= 1- q
q*= 1/3, p* = (1+1/3) / 2 = 2/3

2. Pigou Tax: S+t: q=p-t

Same way of solution as in ex1