Study Guide for Microeconomics
9th Edition
ISBN: 9780134741123
Author: Robert Pindyck, Daniel Rubinfeld
Publisher: PEARSON
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Question
Chapter 12, Problem 12E
(a)
To determine
The illustration of the demand curve W on the non-OPEC and OPEC supply curve.
(b)
To determine
The optimal price of OPEC.
(c)
To determine
The impact of buyers cartel.
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The Cartel Model: Iran and Iraq. For simplicity, let’s look at the production of just two members of the OPEC: Iran and Iraq. For further simplicity, let’s assume that there are only two production levels available: 2 or 4 million barrels of crude oil per day. Depending on their decision, the total output on the world market could be 4, 6, or 8 million barrels. Suppose the price could be $25, $15, and $10 per barrel respectively. Extraction costs are $2 per barrel in Iran and $4 per barrel in Iraq.
a. Complete the payoff matrix (values in 000,000). Round up your answers to no decimals.
Firm 2
Q = 2
Q = 4
Firm 1
Q = 2
,
,
Q = 4
,
,
b. The NE is(are): (Write A, B, C, D, or E)
A. (Q = 2, Q = 2)
B. (Q = 4, Q = 4)
C. (Q = 2, Q = 4)
D. (Q = 2, Q = 2) & A. (Q = 4, Q = 4)
A. (Q = 4, Q = 2)
Consider an industry that consists of 4 firms, all competing over the same market, given by the following demand equation: P=80-3Q All firms have the same Total Cost Function, given by: TC₁=10q,+2q Suppose the firms decide to collude and voluntarily restrict output and raise price, in order to increase profits. a) What price will be charged by the members of the cartel? Assume the head of the cartel is fair and distributes output q, equally among the 4 firms (since they have identical costs). b)What is the output of each individual firm? c) What is each individual firm's profit? We know that there is a built-in incentive for cartel members to cheat on the cartel. If, as a result, the cartel breaks down:
d) What price will be charged in the market? e) Assuming each firm captures an equal share of the market, what now is each firm's output, q? f) What now is individual firm profit?
g) Illustrate your answer
Would you expect the kinked demand curve to be more extreme (like a right angle) or less extreme (like a normal demand curve) if each firm in the cartel produces a near-identical product like OPEC and petroleum? What if each firm produces a somewhat different product?
Chapter 12 Solutions
Study Guide for Microeconomics
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Similar questions
- A certain rural village has numerous small farms which raise livestock. There are two large and equally sized landowners, Jimmy and Bob, which produce hay for the farmers’ animals. Below is the daily village demand for hay Suppose, for simplicity, that Jimmy and Bob have the same constant cost structure, so maximizing total revenue maximizes profit. If Jimmy and Bob initially form a cartel, but subsequently succumb to the temptation to cheat on each other, what will be the Nash equilibrium? Jimmy and Bob will each earn a daily profit of $625. Jimmy will earn a daily profit of $700 and Bob will earn a daily profit of $500. Bob will earn a daily profit of $700 and Jimmy will earn a daily profit of $500. Jimmy and Bob will each earn a daily profit of $525.arrow_forwardConsider the Bertrand model and answer the question below related to the content. Assume that each firm in the Bertrand Duopoly model can only choose non-negative integer quantities: 0, 1, 2, ... . Assume the demand is Q(P)=10-P and the marginal cost is 0 for each firm. Given this information, which of the following is FALSE? [Hint: Check values of profit functions.] A. If firm 2 sets price equal to 1, then the best response of firm 1 to this price is 1 B. If firm 2 sets price equal to 4, then the best response of firm 1 to this price is 4 C. If firm 2 sets price equal to 2, then the best response of firm 1 to this price is 1arrow_forwardMays and McCovey are beer-brewing companies that operate in a duopoly (two-firm oligopoly). The daily marginal cost (MC) of producing a can of beer is constant and equals $0.60 per can. Assume that neither firm had any startup costs, so marginal cost equals average total cost (ATC) for each firm. Suppose that Mays and McCovey form a cartel, and the firms divide the output evenly. (Note: This is only for convenience; nothing in this model requires that the two companies must equally share the output.) Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and combined quantity of output if Mays and McCovey choose to work together. Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forward
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