Economics HW NYU

1. Micro-economic Homework 8
7.16. XPTO sunglasses. The demand for XPTO sunglasses is given by D(p) = 100-
2 p and the supply curve is given by S(p) = 3p.
(a) Compute the equilibrium price and equilibrium quantity of XPTO
sunglasses.
(b) Sketch both the demand and supply curves on the same graph (be sure to
label your axes correctly).
(c) Determine the value of consumer surplus and producer surplus at the
equilibrium values.
Suppose all sunglasses are imported from China. Suppose also that the
government imposes an import tariff of $10 per unit.
(d) Determine the new equilibrium values of price and quality.
(e) Determine the tariff’s impact on consumer surplus, producer surplus, and
total surplus.

4. 8.13. K and Giant Corporation. You are the CEO of K, a small firm in a market
which is dominated by Giant Corp., which commands 95% of the market. Your
current challenge is to decide whether K should expand its capacity. If you don’t,
you expect to earn $2 m, as you did last year, whereas Giant will earn $30 m. If
you do expand, your profits depend on whether Giant responds aggressively by
cut- ting its price or passively by maintaining price at its current level. The
estimated possible payoffs if you expand are:
• If Giant responds aggressively, you will lose $2 m and Giant earns $10 m.
• If Giant responds passively, your profits increase to $4 m and Giant earns $20
m.
Use a game tree to study the strategic interactions between K and Giant. Should K
expand capacity?