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1. Alpha Airlines, the only carrier currently offering flights to and from town A heard that Beta Airlines was thinking of entering the market. In an effort to deter Beta, Alpha threatens that it will respond to Beta’s entry with a price war. Suppose Beta believes the threat. What possible actions can Beta take to minimize the losses of such a price war other than by choosing not to enter the route to and from town A? (give me at least two ways she can do this)

2. Firm A sells goods to two types of clients, q1 =100-p and q2 =200-p, and has the same marginal cost equal to 20 of producing the goods to be sold to both clients.

a) Suppose Firm A can distinguish both consumer types and is able to charge non linear prices, what is the best pricing strategy firm A should pursue?

b) Suppose firm A cannot price discriminate nor charge non linear pricing, what is the best strategy and how much does she sell to consumers 1 and 2?

3. Suppose, given the setup of question 2, that consumers of type one all become type 2 and now firm A
faces that aggregate demand.

a) What is aggregate demand as a function of p?

b) Firm A now needs to purchase the good from a supplier Firm W, which also has monopoly power. Suppose Firm W’s marginal costs are equal to 30. Suppose Firm W decides to sell the good to Firm A at a price pw , and then firm A given pw and its retail costs decides to set the final retail price to consumers. In
this context, where both are monopolists, what is the pw , the p, and what is total quantity sold?

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c) Suppose Firm A purchases Firm W. What is the new optimal retail price and quantity sold?

d) What happened to Firm A’s and W’s profits from b to c ? Why did profits change the way they did?

4. Please consider the following average Data on VOC, where averages are computed as an average over counties that got considered in…

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