Managerial Econs

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BSP1005 NUS Business School

Semest II, AY 2012-2013

BSP1005 Managerial Economics

PROBLEM SET IV

 

Deadline: 12 noon, Monday, 15 April Late Submission is not accepted.

INSTRUCTRIONS

1. Please follow the usual routines: One common work is to be submitted per each team. Submission can be in softcopy or hardcopy as you prefer. Softcopies should be emailed to your tutor and hardcopies should be directly submitted to the tutor’s office/mailbox as was guided by your tutor.

2. When submitting, please write on the cover page the followings:    Tutorial Section Number Your Tutor’s Name Names of Team Members

BSP1005 NUS Business School

Semest II, AY 2012-2013

QUESTION I (10x4 = 40 marks)

British Gas (BG) and NPower (NP) are two major British electricity suppliers. They both have an identical cost function 15 0.0005 Suppose that BG and NP’s generators are connected to a common grid. This grid only has generators from these two suppliers and it provides electricity for 10000 identical British households. Each household has a demand function for electricity 28 (1) If BG and NP compete in setting quantities in a Cournot game, compute BG and NP’s output levels and the market electricity price. (2) If BG is the Stackelberg quantity leader and NP is the follower, compute BG and NP’s output levels and the market electricity price. (3) If BG and NP collude in setting quantity to maximize their joint profit, compute the market electricity price. (4) A third supplier, Sainsbury’s Energy (SE), is considering whether to connect its generators to this grid. It has a cost function 10 0.0005

The connection requires paying the government 30,000 for a supplier’s license, which cannot be resold or refunded later. SE also knows that if it decides to pay the license fee and connects to the grid, the three suppliers BG, NP and SE will play a Cournot game once for all to get their profits. Will SE choose to connect? (Hint: SE connects if and only if...
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