Consider a Japanese firm that sells product Y in the local market and contemplates sales to the US. If the Japanese firm enters the American market it will compete in quantities against a US firm already in the market. The inverse demand for Y in the US is Pus = 250 - Q (all prices and costs in this problem are in $US), where Q = qu + q1, is total quantity eventually sold by the two competitors. The production of Y requires operating a plant at a fixed cost F = 300, as well as 1 unit of labor and 1 unit of capital per unit of output. Currently, at both the US and Japan the cost of capital is $15/unit and that of labor $10/unit. The Japanese firm has the option to either invest directly in operating a plant in the US, or use at no extra fixed cost its already existing plant in Japan, shipping its product to the US. In that case a transportation cost of $10/unit has to be paid on top of any production cost; also, American customs require a $5/unit duty for any Y imports.

Consider a Japanese firm that sells product Y in the local market and contemplates sales to the US. If the Japanese firm enters the American market it will compete in quantities against a US firm already in the market. The inverse demand for Y in the US is Pus = 250 - Q (all prices and costs in this problem are in $US), where Q = qu + q1, is total quantity eventually sold by the two competitors. The production of Y requires operating a plant at a fixed cost F = 300, as well as 1 unit of labor and 1 unit of capital per unit of output. Currently, at both the US and Japan the cost of capital is $15/unit and that of labor $10/unit. The Japanese firm has the option to either invest directly in operating a plant in the US, or use at no extra fixed cost its already existing plant in Japan, shipping its product to the US. In that case a transportation cost of $10/unit has to be paid on top of any production cost; also, American customs require a $5/unit duty for any Y imports.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter15: Imperfect Competition

Section: Chapter Questions

Problem 15.10P: Inverse elasticity rule Use the first-order condition (Equation 15.2 ) for a Cournot firm to show...

See similar textbooks

Similar questions

Inverse elasticity rule Use the first-order condition (Equation 15.2 ) for a Cournot firm to show that the usual inverse elasticity rule from Chapter 11 holds under Cournot competition (where the elasticity is associated with an individual firm's residual demand, the demand left after all rivals sell their output on the market). Manipulate Equation 15.2 in a different way to obtain an equivalent version of the inverse elasticity rule: pMCp=sieQ,p , where si=qi/Q is firm i's market share and eQp is the elasticity of market demand. Compare this version of the inverse elasticity rule with that for a monopolist from the previous chapter.
A market analysis employed by the “Sad Student Company” reveals that the number oflots of the game named “Handsome Killer: Revenge of the Teacher” ordered by thewholesalers when the game is offered at a price of dollars per lot is given by the formula:p=1500-2.5qa) Find the company’s total, marginal and average revenues b) Find the price and quantity maximizing the total revenue by first expressing therevenue as a function of price rather than of quantity
Suppose the European Union (EU) is investigating a proposed merger between two of the largest distillers of premium Scotch liquor. Based on some economists’ definition of the relevant market, the two firms proposing to merge enjoyed a combined market share of about two-thirds, while another firm essentially controlled the remaining share of the market. Additionally, suppose that the (wholesale) market elasticity of demand for Scotch liquor is –1.3 and that it costs $16.20 to produce and distribute each liter of Scotch. Based only on these data, provide quantitative estimates of the likely pre- and postmerger prices in the wholesale market for premium Scotch liquor. In light of your estimates, are you surprised that the EU might raise concerns about potential anticompetitive effects of the proposed merger? Explain carefully.
Suppose the European Union (EU) is investigating a proposed merger between two of largest distillers of premium Scotch liquor. Based on estimates from the EU’s economists, these two firms have a combined market share of about two-thirds of all sales in the relevant market. The only remaining firm controls the other one-third of the market. Economists have estimated that the wholesale market price elasticity of demand for Scotch is −1.3 and the unit cost to produce and distribute the Scotch is 16.20 per liter. Using the available information, provide quantitative estimates of the pre- and post-merger prices for Scotch in the wholesale market. In your opinion, is the EU’s concern about the merger justified? Why or Why not?
Need answer for part b only Zeus and Iron are the only two cement producers in Gotham. The cement they produce is essentially identical. In this market, each firm chooses the output level to produce and the price is determined by aggregate output (Cournot competition). The inverse demand for cement is given by P = 225 − Q/2 . Q is measured in tons and P is in euros. The marginal cost for Zeus is constant at 50 euros/ton. The respective cost for Iron is constant at 40 euros/ton. A technological innovation in the production process allows both firms to reduce marginal cost by 5 euros/ton. a) How much would each firm be willing to pay for the innovation, if it were the only firm to acquire it? b) Consider a situation where firms’ managers, simultaneously and non-cooperatively decide whether to acquire the innovation or not, which costs 900 euros, and then compete in quantities. What is the equilibrium of this game, based on its payoff matrix?
Suppose you are the economic adviser ofa company producing three brands of mobile pnones;Nokia 10, Samsung X and iPhone 7. Suppose further that, your company currently sells 120units of iPhone Z at e800 per unit, 150 units of Samsung X at e800 per unit and 200 units ofNokia 10 at e100 per unit, but in a bid to maximize profit, the company's managing directorproposes an increase in price of Samsung X from e800 to e1000 per unit for which quantitydemanded is anticipated to fall from 150 to 100 units; iPhone Z from e800 to e 1200 per unitfor which quantity demanded is anticipated to fall from 120 to 100 units; and Nokia 10 from100 to 200 per unit for which quantity demanded is expected to fall from 200 to 100 unitsUsing the mid-polint formula. compute the price elasticity of demand for each brand.From your answer in i, what is the type and economic interpretatiom of each brand'sii.value of elasticity.
Two firms sell an identical product in a market by setting prices simultaneously. Consumers buy from the firm that offers the lower price; if the prices are identical, the firms split the demand. If ? is the lowest price (in dollars), aggregate demand is ? = 250 − ?. Suppose prices can only be set in increments of 1 cent. (a) Suppose Firm 1 and Firm 2 have limited production capacities of 40 units each. The marginal cost of firm 1 is $35 and the marginal cost of firm 2 is $25. If Firm 1 believes that Firm 2 will set a price of $30, what price should Firm 1 set? Show your work. (Assume efficient rationing while calculating firm’s residual demand.) (b) Ignore the information in part (a). Suppose each firm has unlimited capacity, but that the marginal costs of Firm 1 and Firm 2 are $40 and $150 respectively. Do ?1 = 149.99 and ?2 = 150 satisfy the requirements of a Nash equilibrium? Explain why. You must explain why a strategy is a best response or not to the other strategy.
Suppose two firms face market demand of P=150-Q, where . Both firms have the same unit cost of C, which consist of your student number a plus 20 (i.e. if your student number a=3, then cost C=20+3=23). Assume the firms compete a la Stackelberg. Firm 1 is the leader and Firm 2 is the follower in this market. What is the follower’s total revenue function? Determine the equilibrium output level for both the leader and the follower. Determine the equilibrium market price. Determine the profits of the leader and the follower.
Directions: Analyze and answer the questionsCompetitive PricingFirms need to take care when responding to competitor’s action with a pricing change,as this could trigger a potential price war. Therefore, in this activity you need to identifywhat would be the most appropriate pricing reaction for the following generic situationsactions.1. To communicate the high quality of your product against a new competitor2. The market that the firm operates in is deregulated (allowing more competitorsto enter)3. A new substitute product/industry emerges4. A major increase in production costs occurs5. The firm is looking to benefit from economies of scale6. When you know that key competitors will always match your price changes7. To increase market share significantly8. For one of the firm’s brands/products that has increased its brand equity9. When the firm’s product is experiencing high seasonal demand10.When a major competitor leaves the marketQUESTIONS1. For each of the above situations,…
COURSE: MICROECONOMICS - Stackelberg ModelIn a given market good there are only 2 firms that satisfy the demand, and their respective total cost functions are: CTi = 400 and the demand that is estimated is P = 120 - 2QIf the exception variable of both firms is the quantity they will produce, such that the decisions to produce are made sequentially firm number 1 will be the leader who decides the quantity to produce and firm number 2 (follower) decides based on the production of firm number 1, we ask:(a) quantity produced by each firm and its equilibrium price in the market.(b) Profit of each company at equilibrium and (c) Graph your results
Assuming you are the managing director of a firm that produces three goods: A, Band C. The price elasticity of demand for A is 1.2, for B it is 1.00 and for C it is 0.75.It is known that he firm is experiencing serious cash flow problems and you have toincrease total revenue as soon as possible. If you were in a position to set the pricesfor these goods, what would be your pricing strategy for each product
Consider a single country and a single good. The demand curve for this good is given by QD = 144 - 4P. Thereare two firms serving the market: Firm A and Firm B, where Firm A has a marginal cost of $20 and Firm B hasa marginal cost of $16. There are no fixed costs incurred by either firm. Assume that these firms compete in Bertrand fashion. Part I. What is the equilibrium price in the market? Explain your reasoning. Part II. How many units of output each firm produces? Show your work. Part III. How much profit each firm makes? Show your work. Part IV. What is the consumer surplus? Show your work.