GMS402 Fall 2012 Dr. Sui Sui
Short Answer Questions
1. A risk-neutral price-taking firm must set output before it knows for sure the market price. There
is a 50 percent chance the market demand curve will be and a 50 percent chance
it will be . The market supply curve is estimated to be .
a. Calculate the expected (mean) market price.
b. Calculate the variance of the market price.
c. If the firm's marginal cost is given by , what level of output maximizes
a. When demand is Q = 10 - 2P, the market price is obtained by equating Q = Q : d s
d d s
When demand is Q = 20 - 2P, the market price is obtained by equating Q = Q :
The expected (mean) market price is thus
b. The variance in the market price is
c. Expected profits are maximized when MC = expected price, or.01 + .5Q = 13/3. Solving for Q gives
us Q = 8.65.
Page 1 of 2 GMS402 Fall 2012 Dr. Sui Sui
2. Suppose that there are two types of cars, good and bad. The qualities of cars are not observable
but are known to the sellers. Risk-neutral buyers and sellers have their own va