Question 1

Consider a monopolist that produces for two periods. The demand curves in both periods are q t = 1 - pt for t = 1, 2. The marginal costs are c in the first and c- λq¹ in the second period. Here, λ is a small and positive number. There is a discount factor of ∂ between the periods.
1. Explain briefly how the monopolist's problem changes compared to a situation where the marginal cost is c in both periods.

2. Find the quantities q¹ and q² that the monopolist chooses in the two periods. Hint: Start by solving the monopolist's problem in the second period and then continue to the first period.

3. Evaluate the effect of λ and discuss your result.



Question 2

In the recent financial crisis, rating agencies have become a focus of attention. The market has traditionally been dominated by a few big agencies, currently Standard & Poor, Moody’s and Fitch. In 2006, the Securities and Exchange Commission (SEC) introduced measures to speed up the approval process for rating agencies with the aim to increase competition. However, in response to the financial crisis, the Fed introduced lending programmes for which this is what it said initially it accepts only collateral that has been appraised by one of the big three.

Discuss the likely consequences of such a decision on market structure.