# Prof. Bryan Caplan

bcaplan@gmu.edu

http://www.gmu.edu/departments/economics/bcaplan

Econ 103

Spring, 2000

Gwartney and Stroup:(2-3 sentences)

Chapter 7, Critical Analysis: 11

Chapter 8, Critical Analysis: 2, 11

1.  GM, Ford, and Chrystler compete in the car market.  GM’s marginal cost of producing a car is \$8000; Ford’s is \$10,000; Chrystler’s is \$11,000.  The market works like we discussed in class: the low-bidder gets the whole market, and a tie splits the market evenly.

A.                 What price will result from competition between these firms?

B.                 What are the profits per car sold for each firm?  Does any firm earn positive profits?

C.                How many firms actually produce cars?

D.                The government argues that GM is a “monopoly” and puts a \$2000/car tax on GM cars as punishment.  What happens to the car market now?  Who benefits from this?

2.  The Queen holds on auction on the monopoly right to produce and sell tea.  There are two available producers of tea.  The demand curve for tea, and the costs of the two producers (Lancaster and York), are given in this table:

£1,000,000

£400,000

£500,000

£1,350,000

£600,000

£750,000

£2,400,000

£1,200,000

£1,500,000

£2,240,000

£1,280,000

£1,600,000

£2,040,000

£1,360,000

£1,700,000

£1,800,000

£1,440,000

£1,800,000

£1,520,000

£1,520,000

£1,900,000

£1,200,000

£1,600,000

£2,000,000

## 4200

£840,000

£1,680,000

£2,100,000

A.        If Lancaster received the monopoly privilege, what price and output level would he set?  What would his (gross) monopoly profits be?

B.                 If York received the monopoly privilege, what would his price, output, and (gross) monopoly profits be?

C.                If the Queen auctioned off the monopoly privilege to Lancaster and York, who would win the auction?  How much would the winner pay?