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- When OPEC raised the price of oil dramatically in the mid-1970s, experts said it was unlikely that the cartel could stay together over the long term-that the incentives for individual members. to cheat would become too strong. More than fort),r years later, OPEC still exists. Why do you think OPEC has been able to beat the odds and continue to collude? Hint: You may wish to consider non-economic reasons.Consider the curve in the figure below, which shows the market demand. marginal cost, and marginal revenue curve for firms in an oligopolistic industry. In this example, we assume firms have zero fixed costs. Suppose the firms collude to form a cartel. What price will the cartel charge? What quantity will the cartel supply? How much profit will the cartel earn? Suppose now that the cane] breaks up and the oligopolistic firms compete as vigorously as possible by cutting the price and increasing sales. What will be the industry quantity and price? What will be the collective profits of all firms in the industry? Compare the equilibrium price, quantity, and profit for the cartel and cutthroat competition outcomes.Is it true that the four-firm concentration ratio puts more emphasis on one or two very large films, while the Herfindahl-Hirshmau Index puts more emphasis on all the films in the entire market? Explain briefly.
- 4. Imagine a market with demand P = 420 – Q in each period. Two firms are thinking about colluding. They each have cost C(Qi) = 60Qi. If they cooperate and behave as a monopoly, then they have a marginal revenue curve, MRm = 420 – 2Q, and a marginal cost curve, MCm = 60. If they are in a cartel, then the firms will split the monopoly production and profits. If they compete, then they face MRi = 420 – 2Qi – Q-I and MCi = 60. a. If the firms stick to their agreement (cooperate), how much per-period profit do they each make? b. If they are not able to maintain their agreement (compete), what is their per-period profit? c. If one firm cheats on their agreement (deviate), how much does each firm make? Be sure to specify both the profit for the cheater and the firm cheated-on. d. Suppose the firms assume that their interaction will last forever (r = 1) and they share the common discount value R. What is the lowest value of R such that both firms are willing to continue with the cartel…4. Imagine a market with demand P = 420 – Q in each period. Two firms are thinking about colluding. They each have cost C(Qi) = 60Qi. If they cooperate and behave as a monopoly, then they have a marginal revenue curve, MRm = 420 – 2Q, and a marginal cost curve, MCm = 60. If they are in a cartel, then the firms will split the monopoly production and profits. If they compete, then they face MRi = 420 – 2Qi – Q-I and MCi = 60. d)Suppose the firms assume that their interaction will last forever (r = 1) and they share the common discount value R. What is the lowest value of R such that both firms are willing to continue with the cartel agreement described above?Question 2Bob and Alice are duopoly competitors for ice cream in Venice Beach,CA. Market demand for ice cream is p = 1000 − 2Q and both Alice’sand Bob’s costs of production are identical and given by C(q) = 4q.Calculate market price and quantity ifc) Alice and Bob decide to coordinate their decisions in a cartel (i.e.to build a monopoly) and to equally share profits.
