1. Consider a natural monopoly.
I. Show graphically and discuss how price and quantity are set by the natural monopolist.
II. Define the areas corresponding to the consumers' surplus and the natural monopolist's profit.
III. Compare the latter areas with the ones corresponding to the consumers' surplus and the industry's profit in a market in which price is set at the marginal cost level.
IV. By looking at these areas, define the difference in the social welfare between the natural monopoly and a market in which price is set at the marginal cost level.
V. Show graphically and discuss the two most common solutions to regulate the price of a natural monopolist.
vi) For either regulatory solution, define the areas corresponding to the consumers' surplus and the natural monopolist's profit.
VI. By looking at these areas, define the attained social welfare for either regulatory solution.
VII. Discuss which solution should be implemented by the government.
2. Show graphically and discuss the effects of the introduction of a subsidy to the consumers who decide to take the new vaccine for the swine flu. The subsidy is intended to cover all direct and indirect costs of taking the vaccine (travel expenditure, time spent) and is set by the government to a level equal to the marginal external benefit of the vaccine.
3. Consider a public good game, in which two individuals, A and B, each with an endowment of £2, independently and simultaneously decide whether to put their money into a private or into a public account. All individual contributions into the public account are pooled together and multiplied by a factor equal to
1.2. The utility to each individual are UA = 2- qA+ 1.2*(qA + qB) and UB = 2- qB+1.2*(qA + qB), respectively. Represent the table of players' payoffs for this public good game. Discuss the optimal strategies, the Pareto optimum and the Nash equilibria of the game.
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