Suppose that a typical firm in a monopolistically competitive industry faces a demand curve given by: q = 60 − (1/2)p, where q is quantity sold per week. The firm’s marginal cost curve is given by: MC = 60. 1. How much will the firm produce in the short run? 2. What price will it charge? 3. Draw the firm’s demand, marginal revenue, and marginal cost curves. Does this solution represent a long-run equilibrium? Why or why not?
Suppose that a typical firm in a
curve given by: q = 60 − (1/2)p, where q is quantity sold per week.
The firm’s marginal cost curve is given by: MC = 60.
1. How much will the firm produce in the short run?
2. What price will it charge?
3. Draw the firm’s demand, marginal revenue, and marginal cost curves. Does this
solution represent a long-run equilibrium? Why or why not?
Sometimes oligopolies in the same industry are very different in size. Suppose we have a
duopoly where one firm (Firm A) is large and the other firm (Firm B) is small, as shown
in the prisoner’s dilemma box in Table 5.
Firm B colludes with
Firm A
Firm B cheats by
selling more output
Firm A colludes with Firm
B
A gets $1,000, B
gets $100
A gets $800, B gets
$200
Firm A cheats by selling
more output
A gets $1,050, B
gets $50
A gets $500, B gets
$20
Assuming that the payoffs are known to both firms, what is the likely outcome in this
case?
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