Microeconomics (Spring 2017)
Problem Set 10: Oligopoly and Asymmetric Information
Submit in Recitation or Lecture, May 1/2, whichever comes first • Write your answers on separate sheets of paper. Please include:
– your name
– your recitation teacher’s name
– day and time of your recitation
Part I: Short Answer
1. (Multiple Choice) Adverse selection occurs when
(a) A person takes more risks that are not known to the life insurance company because he has life insurance.
(b) A person buys life insurance because he has a risky lifestyle that is not known to the life insurance
company.
(c) A person is a risk lover.
(d) Pregnant women with health insurance make more doctor visits than uninsured pregnant women.
2. Some universities do not give letter grades. One rationale is that eliminating the letter-grade system reduces
pressure on students, thus enabling them to learn more. Does this policy help or hurt students? (Hint:
consider the role grades play in educating and signaling).
3. Use Akerlof’s lemons model to explain why restaurants that cater to tourists are likely to serve low-quality
meals.
Part II: Duopoly
1. Duopoly quantity-setting firms face the market demand:
P = 500–(1/3)Q
where Q = Q1 + Q2 . Each firm has a marginal cost of $80 per unit.
(a) What is the Cournot equilibrium?
(b) What is the Stackelberg equilibrium when Firm 1 moves first?
2. Suppose two firms are competing in prices (Bertrand) in an industry where demand is p=200-8Q.
(a) If both firms have MC=120, what is the equilibrium quantity for each firm? Profits?
(b) Suppose one firm has MC=150 and one has MC=0. How much profit does each firm make?
(c) Suppose one firm has MC=120 and one has MC=100. Approximately how much profit does each firm
make? 1

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