Suppose the market for cigarettes is characterized by the following information : Qd= 70-5P (demand) Qs = 3P-10 (Supply) Suppose the government impose a sales tax of $2 per unit. Calculate the Dead-Weight-Loss due to the sales tax. (Note : P= Price per unit; Qd= thousands of units demanded; Qs = thousands of units Supplied) Solution Let us first find the equilibrium price an quantity for the market. The demand and supply function for the cigarettes is given as, Qd = 70.

1. Suppose the market for computer chips is dominated by two firms: Intel and AMD. Intel has
discovered how to make superior chips and is considering whether or not to adopt the new
technology. Adoption would entail a fixed setup cost of F but would increase revenues.
However, if Intel adopts the new technology, AMD can easily copy it at a lower setup cost of
F/2. If Intel adopts and AMD does not, Intel would earn $20 in revenues while AMD would earn
$0. If Intel adopts and AMD does likewise, each firm will earn $7 in revenues. If Intel does not
adopt the new technology, it will earn $3 and AMD will earn $2. Each firm cares only about its
own profits. The extensive form representation of the game is shown below. Suppose F = 16.
Then, using backward induction, what prediction do we obtain?
A. Intel will not adopt the new technology.
B. Intel will adopt the new technology, and so will AMD.
C. Intel will adopt the new technology, and AMD will not adopt it.
D. All of the above.
Solution
ANs: C
When F=16
Let intel adopt the technology, if AMD adopt payoff is (-9,-1), and if AMD donot adopt payoff is
(4,0). So using backward incudtion, when AMD adopt the technology, best decision for intel is
not adopt technology (-1<3).
But AMD will not adopt the technology as in both case by not adopting its payoff is higher (0>-
1).
When AMD donot adopt , best decion for intel is adopt as (4>3).