1. Consider the (inverse) market demand function for the market in streaming services.
P = 120 – 4Q
Assume further that the available technology results in Marginal Cost equal to $40.
a) Graphically show the market outcome for monopoly, Cournot oligopoly and perfect
competition.
b) For monopoly, Cournot duopoly and perfect competition determine the optimal
outcome. Clearly explain how you arrive at your answer. What are the market price
and quantity under each market structure?
c) What are the consumer surplus, producer surplus and total surplus under each
scenario?
d) Show the reaction function under Bertrand competition. What are the associated price
and quantity?
2. The Biden administration has announced that it wants to increase the corporate
income tax rate from 21% to 28%. The corporate income tax is a tax on corporate
profits and can be seen as a tax on the return on capital. This is known as the rental
rate of capital, and is the compensation the owners of capital used in the production
process obtain. The rental rate of capital is determined in the market for loanable
funds.
a) Show the equilibrium in the loanable funds market and demonstrate how the change
in the corporate income tax rate affects the equilibrium. Carefully explain your
findings.
b) Show graphically how the change in the loanable funds market affects the equilibrium
in the labor market. Carefully explain how the changes work from one market to the
next.
c) Show how the equilibrium in the labour market affects the equilibrium in the goods
market. Carefully explain how the changes work from the labour market to the goods
market.
d) In light of this discussion how do you evaluate the Biden’s administration’s claim that
the corporate income tax hike will only affect the richest corporate shareholders?
3. Monopolistic competition: Assume firms are identical in terms of their cost structure (e.g., their cost curves are thesame).
a) In a monopolistically competitive market, the government applies a specific tax of $1
per unit of output. What happens to the profit of a typical firm in this market? Does
the number of firms in the market rise or fall?
b) What is the effect on prices and the number of firms under monopolistic competition if
a government subsidy is introduced that reduces the fixed cost of each firm in the industry?
c) Monopolistic competition is sometimes considered inefficient. Why? Are there any
welfare enhancing features? Why do monopolistic firms often have excess capacity?
4. The other day, a progressive policy analyst came on CNN and during the very same
interview discussing the U.S. labor market claimed that the minimum wage has a
negligible effect on unemployment of the unskilled and also that higher rates of
immigration of unskilled laborers has a negligible effect on the wage rate of native
born unskilled workers. Do you agree? Are these claims even consistent? How could
you validate these claims empirically?
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