ECON 2103: Problem Set 8
Due: Thursday, April 28, 2016 in Class
Max. Points: 20
Problem # 1:
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
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?
Problem # 2:
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.
ProfitECON 2103: Problem Set 8
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?
Is NCAA an illegal cartel?
Read the following article/listen to the story:
cartel (Planet Money)
Based on our discussion in class, do you think NCAA is an illegal cartel?