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Principles of Microeconomics
Assignment #5 (20 marks)
Due: Wednesday, April 06, 2016 at the beginning of class.
Late assignments will not be accepted.
1. Jimmy has a room that overlooks (from a distance) a major league baseball stadium. He
decides to rent a telescope for $50 a week and charge his friends and classmates for a 30
second ?peep? at the game. He can act as a single price monopolist for renting out ?peeps?;
for each person who uses takes a peep, it costs him $0.20 to clean the eyepiece. The
following table illustrates the information that Jimmy has gathered about demand for this
1.20 1.00 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10
Price of Peep
100 150 200 250 300 350 400 450 500 550
a. For each price in the table above, calculate the total revenue from selling peeps and the
marginal revenue per peep. (4 marks)
b. At what quantity will Jimmy?s profit be maximized? What price will he charge? What
will be his total profit? (4 marks)
c. Jimmy?s landlady complains about all the visitors coming into the building and tells
Jimmy to stop selling peeps; Jimmy finds out, though, that if he gives her $0.20 per
peep she?ll stop complaining. What effect does this bribe have on Jimmy?s marginal
cost per peep? What is the new profit-maximizing quantity of peeps? What impact
does this bribe have on Jimmy?s total profit? (4 marks)
2. Two firms, VolgaBus and GMB, are competing to sell 100 buses to MetroTravel, a cityowned bus company. They each submit a sealed bid to get the contract, with the contract
going to the lowest bid. Each firm has the option of submitting a low-price bid of $15 000
per bus, or a high-price bid of $20 000 per bus. In the event of a tie, the city will buy 50
buses from each firm.
a. Draw a payoff matrix for this simultaneous game. (4 marks)
b. Based on your matrix from part a., what will the Nash equilibrium be? Explain in detail
how you arrived at your answer. (4 marks)
Show all of your calculations and explain your steps.
When drawing graphs, try to be as accurate as possible; poorly drawn or inaccurate graphs will lose marks.
You can think about the assignment in a group, but you have to convince me that you wrote the answer alone; copied
assignments will receive zero.
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