P3 2. Suppose that in the cola soft drink market, the companies Coca-Colaand Pepsi-Cola compete in an oligopoly. Let q is the number of cansproduced by each company in millions. If the total costs of each oneare given by:TCc = 10 + 130qCTCp = 10 + 170qpwhere qc and qp represents the production of cola cans in millons forPepsi Cola and Pepsi Cola, respectively, thus, the marginal costsand average total cost of each one are, respectively:MCc = ACC = $130MCp = ACP = $170In addition, the demand curve for an average trip for this market isgiven byP = 1,000 – Qwhere Q is the total of cans produced in the market in millions.a) If each company can offer only 100, 200 or 300 million of trips,calculate the benefits that each company could obtain, and sayhow much each company would produce in the Nash equilibrium.Calculate also the quantity and the equilibrium price in the mar-ket.b) Now suppose that Pepsi-Cola leaves the market so Coca-Colaremains as a monopolist in this market. Considering that its Mar-ginal Revenue function is now MRC = 1000 - 2qc. What is thequantity and the price equilibrium in the market? Calculate theCoca-Cola's benefits.c) Suppose the government now allows free entry and exit of pro-ducers and makes the market as a competitive market. Calculatenow the quantity and the equilibrium price under perfect compe-tition. Use the highest marginal cost (MC = 170). What is thebenefit of each of the firms in the long term?d) Graph the market demand curve and all market equilibriums cal-culated in the preceding subsections. Compare your results andsay under what market structure the price is higher and underwhich the quantity offered is the highest. Which market structureis most convenient for producers?

In a competitive market, the equilibrium condition is given by P=MC

b) Now suppose that Pepsi-Cola leaves the market so Coca-Cola remains as a monopolist in this market. Considering that its Mar- ginal Revenue function is now MRc = 1000 - 29c. What is the quantity and the price equilibrium in the market? Calculate the %3D Coca-Cola's benefits.

b) Now suppose that Pepsi-Cola leaves the market so Coca-Cola remains as a monopolist in this market. Considering that its Mar- ginal Revenue function is now MRc = 1000 - 29c. What is the quantity and the price equilibrium in the market? Calculate the %3D Coca-Cola's benefits.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter10: Monopolistic Competition And Oligopoly

Section: Chapter Questions

Problem 3SCQ: Consider the curve in the figure below, which shows the market demand. marginal cost, and marginal...

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Question

2. Suppose that in the cola soft drink market, the companies Coca-Cola
and Pepsi-Cola compete in an oligopoly. Let q is the number of cans
produced by each company in millions. If the total costs of each one
are given by:
TCc = 10 + 130qC
TCp = 10 + 170qp
where qc and qp represents the production of cola cans in millons for
Pepsi Cola and Pepsi Cola, respectively, thus, the marginal costs
and average total cost of each one are, respectively:
MCc = ACC = $130
MCp = ACP = $170
In addition, the demand curve for an average trip for this market is
given by
P = 1,000 – Q
where Q is the total of cans produced in the market in millions.
a) If each company can offer only 100, 200 or 300 million of trips,
calculate the benefits that each company could obtain, and say
how much each company would produce in the Nash equilibrium.
Calculate also the quantity and the equilibrium price in the mar-
ket.
b) Now suppose that Pepsi-Cola leaves the market so Coca-Cola
remains as a monopolist in this market. Considering that its Mar-
ginal Revenue function is now MRC = 1000 - 2qc. What is the
quantity and the price equilibrium in the market? Calculate the
Coca-Cola's benefits.
c) Suppose the government now allows free entry and exit of pro-
ducers and makes the market as a competitive market. Calculate
now the quantity and the equilibrium price under perfect compe-
tition. Use the highest marginal cost (MC = 170). What is the
benefit of each of the firms in the long term?
d) Graph the market demand curve and all market equilibriums cal-
culated in the preceding subsections. Compare your results and
say under what market structure the price is higher and under
which the quantity offered is the highest. Which market structure
is most convenient for producers?

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