The two largest cigarette producers are Phillip Morris and R. J. Reynolds. Both are considering whether to increase their price for a pack of cigarettes or keep the price unchanged. The relevant factors to consider are: 1) demand for cigarettes is inelastic, so if both firms raise prices they will increase their revenue, and 2) if one raises price and the other doesn't, they will lose market share to their rival R. J. Reynolds Increase No change Increase R: 500 million R: 400 million P: 600 million P: 300 million Phillip Morris No change R: 200 million R: 300 million P: 500 million P: 400 million Does either cigarette maker have a dominant strategy? Why or why not? Use the above matrix to answer, and assume the two companies do not cooperate For purposes of the problem, ignore the existence of other cigarette makers. 2. Does the answer to #1 change if the two firms can cooperate? 3. How would your answer to #1 change if the outcome matrix changed to the following: R. J. Reynolds Increase No change R: 500 million P: 300 million Increase R: 400 million P: 500 million

The two largest cigarette producers are Phillip Morris and R. J. Reynolds. Both are considering whether to increase their price for a pack of cigarettes or keep the price unchanged. The relevant factors to consider are: 1) demand for cigarettes is inelastic, so if both firms raise prices they will increase their revenue, and 2) if one raises price and the other doesn't, they will lose market share to their rival R. J. Reynolds Increase No change Increase R: 500 million R: 400 million P: 600 million P: 300 million Phillip Morris No change R: 200 million R: 300 million P: 500 million P: 400 million Does either cigarette maker have a dominant strategy? Why or why not? Use the above matrix to answer, and assume the two companies do not cooperate For purposes of the problem, ignore the existence of other cigarette makers. 2. Does the answer to #1 change if the two firms can cooperate? 3. How would your answer to #1 change if the outcome matrix changed to the following: R. J. Reynolds Increase No change R: 500 million P: 300 million Increase R: 400 million P: 500 million

Principles of Microeconomics (MindTap Course List)

8th Edition

ISBN:9781305971493

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter17: Oligopoly

Section: Chapter Questions

Problem 9PA

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Suppose the market for Hula Hoops is monopolized by a single firm. a. Draw the initial equilibrium for such a market. b. Now suppose the demand for Hula Hoops shifts outward slightly. Show that, in general (contrary to the competitive case), it will not be possible to predict the effect of this shift in demand on the market price of Hula Hoops. c. Consider three possible ways in which the price elasticity of demand might change as the demand curve shifts: It might increase, it might decrease, or it might stay the same. Consider also that marginal costs for the monopolist might be increasing, decreasing, or constant in the range where MR=MC Consequently, there are nine different combinations of types of demand shifts and marginal cost slope configurations. Analyze each of these to determine for which it is possible to make a definite prediction about the effect of the shift in demand on the price of Hula Hoops.