Regarding fixed costs of entry A) both incumbents and ...

[audie]

Regarding fixed costs of entry
 
  A) both incumbents and potential entrants are affected by them.
  B) potential entrants are affected by them while incumbents are not.
  C) neither incumbents nor potential entrants consider them.
  D) incumbent's decisions are affected by them, while the potential entrant ignores them.

Question 2

Ian views playing Wartcraft and drinking soda as perfect complements (one soda with one hour of playing Wartcraft). Currently, sodas are 1 each and Wartcraft costs 1 per hour. Ian has 12 of income.
 
  a. Compute Ian's Compensating Variation if the price of Wartcraft rises to 2.
  b. Compute Ian's Equivalent Variation if the price of Wartcraft rises to 2.
  c. Compute Ian's change in Consumer Surplus if the price of Wartcraft rises to 2.

[tjayeee]

Answer to Question 1

B

Answer to Question 2

a. Ian initially will purchase six units of each. When the price of Wartcraft rises to 2, the only bundle which will return Ian to the same indifference curve is (6,6 ). This bundle now costs 18. Thus the CV = 12 - 18 = -6. We need to pay Ian 6 to return him to the initial utility level following the price change.
b. After the price change, with an income of 12, Ian will purchase 4 units of each good. If the prices were still 1 each, then the income level that puts Ian at the bundle (4,4 ) is 8. So the
EV = 8 - 12 = -4.
c. Denote W and S as the quantities of each good. Perfect complements implies that W=S in the optimum. The budget constraint implies that pW + S = 12, where p is the price of Wartcraft and the price of soda is 1. Solve for W = 12/(1 + p). The CS is the integral of 12/(1 + p) between p = 1 and p = 2. This solves to be 4.87 (approx.).