Economics For Today
10th Edition
ISBN: 9781337613040
Author: Tucker
Publisher: Cengage Learning
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Chapter 10, Problem 18SQ
To determine
The
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Consider an industry comprised of three identical firms faced with a linear cost function given by: C(qi) = cqi; for i = 1; 2; 3. Let inverse market demand be given by: P(Q) = a - bQ; where Q = q1 + q2 + q3.a. Compute the Cournot equilibrium; that is, find prices, quantities, and profits.b. Suppose that firms 1 and 2 merge, converting the market into a duopoly consisting of the “superfirm” and firm 3. Compute the new Cournot equilibrium. Once again find prices, quantities, and profits.c. Suppose that all three firms merge. Compute quantities, prices, and profits for the cartel solution.d. Suppose that firm 1 and 2 represent two members of OPEC – Saudi Arabia and Venezuela, say – while firm 3 is a non-OPEC oil exporting country – Russia, say. Describe the dynamics of OPEC. (Hint: re-interpret the solution to part 2, as 1 firm deviating from the fully cartelized solution. Is it convenient to have a partial cartel?)
Answer the given question with a proper explanation and step-by-step solution.
The inverse market demand in a homogeneous-product Cournot duopoly is P = 200 – 2(Q1 + Q2) and costs are C1(Q1) = 26Q1 and C2(Q2) = 32Q2.
Firm 1: Q1 = ? - Q2Firm 2: Q2 = ? - Q1
b. Calculate each firm’s equilibrium output.Firm 1:Firm 2:
c. Calculate the equilibrium market price.$
d. Calculate the profit each firm earns in equilibrium.Firm 1: $Firm 2: $
Consider a two-firm duopoly facing a linear demand curve: P=1,600-Q. Assume MCA=MCB=AC=100
Where: P= Price Q= total output of the market, thus Q=QA+QB
a. find the profit-maximizing output( cournot equilibrium output)
b. find the cournot equilibrium price of firm A and firm B.
3. discuss how agricultural insurance could help farmers improve farm activity.
Chapter 10 Solutions
Economics For Today
Ch. 10.1 - Prob. 1YTECh. 10.5 - Prob. 1GECh. 10.6 - Prob. 1YTECh. 10 - Prob. 1SQPCh. 10 - Prob. 2SQPCh. 10 - Prob. 3SQPCh. 10 - Prob. 4SQPCh. 10 - Prob. 5SQPCh. 10 - Prob. 6SQPCh. 10 - Prob. 7SQP
Ch. 10 - Prob. 8SQPCh. 10 - Prob. 9SQPCh. 10 - Prob. 10SQPCh. 10 - Prob. 11SQPCh. 10 - Prob. 12SQPCh. 10 - Prob. 13SQPCh. 10 - Prob. 1SQCh. 10 - Prob. 2SQCh. 10 - Prob. 3SQCh. 10 - Prob. 4SQCh. 10 - Prob. 5SQCh. 10 - Prob. 6SQCh. 10 - Prob. 7SQCh. 10 - Prob. 8SQCh. 10 - Prob. 9SQCh. 10 - An oligopoly is a market structure in which a. one...Ch. 10 - Prob. 11SQCh. 10 - Prob. 12SQCh. 10 - Prob. 13SQCh. 10 - Prob. 14SQCh. 10 - Prob. 15SQCh. 10 - Prob. 16SQCh. 10 - Prob. 17SQCh. 10 - Prob. 18SQCh. 10 - Prob. 19SQCh. 10 - Prob. 20SQ
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- 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? 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 AFirm B cheats by selling more outputFirm A colludes with Firm BA gets $1,000, B gets $100A gets $800, B gets $200Firm A cheats by selling more outputA gets $1,050, B gets $50A gets $500, B gets $20Assuming that the payoffs are known to both firms, what is the likely outcome in this case?arrow_forwardIn the mobile phone market, Samsung and Apple constitute a duopoly in the production of devices.The American firm has the following demand q_a = 10 - p_a + 0.25p_s, and the Korean firm, q_s = 20 -p_s+ 0.5p_a. Because both firms assembly their devices in China, their cost structure is the same andequal to ?(q) = 10q, answer the following questions.a) What would be the equilibrium (quantity, price, and profit) in this market, and interpret youranswer.b) If they decide to form a cartel, what are the new quantities, prices, and profits?arrow_forwardConsider the markets for tap water, bottled water, cola, and beer. Assume there is only one provider of tap water, bottled water manufacturers use advertising to differentiate their products, cola producers engage in strategic pricing behavior, and the beer market is largely controlled by only a few firms. Classify the market for each of the following drinks as either monopoly, oligopoly, monopolistic competition, or perfect competition. Monopoly Oligopoly Monopolistic Competition Perfect Competition Tap water Bottled water Cola Beerarrow_forward
- The inverse market demand in a homogeneous-product Cournot duopoly is P = 100 – 2(Q1 + Q2) and costs are C1(Q1) = 20Q1 and C2(Q2) = 30Q2. a. What is the reaction function for each firm? b. What is each firm’s equilibrium output? c. What is the equilibrium market price? d. What is the profit each firm earns in equilibrium?arrow_forwardFirms like Papa John’s, Domino’s, and Pizza Hut sell pizza and other products that aredifferentiated in nature. While numerous pizza chains exist in most locations, thedifferentiated nature of these firms’ products permits them to charge prices abovemarginal cost. Given these observations, is the pizza industry most likely a monopoly,perfectly competitive, monopolistically competitive, or an oligopoly industry? Use thecausal view of structure, conduct, and performance to explain the role of differentiationin the market for pizza. Then apply the feedback critique to the role of differentiation inthe industry.arrow_forwardMany home improvement retailers like Home Depot and Lowes have low-price guarantee policies. At a minimum, these guarantees promise to match a rival’s price, and some promise to beat the lowest advertised price by a given percentage.Do these types of pricing strategies result in cutthroat Bertrand competition and zero economic profits? If not, why not? If so, suggest an alternative pricing strategy that will permit these firms to earn positive economic profits.arrow_forward
- Assume a duopoly (two firms: A and B) is facing a common demand equation but different cost equations. Q = 300-20P TCA = 300+20Q+2Q2 TCB = 250+10Q+3Q2 Show the profit maximizing quantity (Q) to each firm (A and B) and the corresponding prices (PA and PB). How would the two firms ultimately resolve price competition?arrow_forwardTrick and Gear are the only two producers of flying brooms. They colluded together illegally to strict output and increase price Each firm has two strategies: Comply with the decisions or Cheat to make more profit individually. ▪ If both Comply, each firm makes $2 million a week. ▪ If both Cheat, each firm makes zero economic profit. ▪ If Trick Complies and Gear Cheats, Trick incurs a loss of $1 million and Gear makes a profit of $4.5 million. ▪ If Gear Complies and Trick Cheats, Gear incurs a loss of $1 million and Trick makes a profit of $4.5 million. Construct a payoff matrix for the game that Trick and Gear must playarrow_forwardPerfect Picture Cameras: Perfect Picture Cameras is a national camera company. It competes with 2-3 national camera companies. In order to gain an upper hand in the market, Perfect Picture Cameras has differentiated its camera by including an automatic focus and flash. Perfect Picture Cameras has the ability to raise its prices because of its unique features. However, it sometimes worries about the decisions and strategies of the other competitors. Choose one type of market structure: Perfect competition oligopoly monopolistic competition monopoly Type of Market Structure: Reason:arrow_forward
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