EP ECONOMICS,AP EDITION-CONNECT ACCESS
20th Edition
ISBN: 9780021403455
Author: McConnell
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Question
Chapter 13.A, Problem 1AP
To determine
The punishment strategy for the cheating firm.
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Consider a “punishment” variation of the two-firm oligopoly situation shown in Figure 14.1. Suppose that if one firm sets a low price while the other sets a high price, then the firm setting the high price can fine the firm setting the low price. Suppose that whenever a fine is imposed, X dollars is taken from the low-price firm and given to the high-price firm. What is the smallest amount that the fine X can be such that both firms will want to always set the high price?
Consider a Cournot oligopoly with n = 2 firms. Firm 1 cost function is TC₁ (9₁) = 20 + 12q₁ + q²,
while firm 2 cost function is TC₂ (9₂) = 50 +8q2 + q2 . The total market demand is P(Q) = 50 — 2Q,
where Q is the total quantity produced by all (active) firms in the industry.
a- Compute the Cournot equilibrium total quantity, price, quantity for each firm, and profit for
each firm. Which firm is making higher profits?
b- Consider the situation in which a third firm (firm 3) enters the market. What is the total
equilibrium quantity, price, quantity and profit for each firm if TC3 = TC₁? [hint: q₁ and q3 will
be the same, since 1 and 3 are identical]
c- How would your answer at point b change if instead TC3 = TC₂? Would consumers prefer firm
3 to enter with the total cost of firm 1 or firm 2?
d- What would be the highest one-time cost that firm 3 would be willing to pay to enter the
market and then compete in a Cournot game with total cost equal to firm 1?
Consider a "punishment" variation of the two-firm oligopoly situation shown in the figure
below. Suppose that if one firm sets a low price while the other sets a high price, then the
firm setting the high price can fine the firm setting the low price. Suppose that whenever a
fine is imposed, X dollars are taken from the low-price firm and given to the high-price
firm.
RareAir's price strategy
High
Low
$12
$15
A
B
High
$12
$6
$6
$8
Low
$15
$8
Instructions: Enter your answer as a whole number.
What is the smallest amount that the fine X can be such that both firms will want to
always set the high price?
$O million
Uptown's price strategy
Chapter 13 Solutions
EP ECONOMICS,AP EDITION-CONNECT ACCESS
Ch. 13.1 - Prob. 1QQCh. 13.1 - Prob. 2QQCh. 13.1 - Prob. 3QQCh. 13.1 - Prob. 4QQCh. 13.4 - Prob. 1QQCh. 13.4 - The D2e segment of the demand curve D2eD1 graph...Ch. 13.4 - Prob. 3QQCh. 13.4 - Prob. 4QQCh. 13.A - Prob. 1ADQCh. 13.A - Prob. 2ADQ
Ch. 13.A - Prob. 3ADQCh. 13.A - Prob. 4ADQCh. 13.A - Prob. 1ARQCh. 13.A - Prob. 2ARQCh. 13.A - Prob. 3ARQCh. 13.A - Prob. 1APCh. 13.A - Prob. 2APCh. 13 - Prob. 1DQCh. 13 - Prob. 2DQCh. 13 - Prob. 3DQCh. 13 - Prob. 4DQCh. 13 - Prob. 5DQCh. 13 - Prob. 6DQCh. 13 - Prob. 7DQCh. 13 - Prob. 8DQCh. 13 - Prob. 9DQCh. 13 - Prob. 10DQCh. 13 - Prob. 11DQCh. 13 - Prob. 12DQCh. 13 - Prob. 13DQCh. 13 - Prob. 1RQCh. 13 - Prob. 2RQCh. 13 - Prob. 3RQCh. 13 - Prob. 4RQCh. 13 - Prob. 5RQCh. 13 - Prob. 6RQCh. 13 - Prob. 7RQCh. 13 - Prob. 8RQCh. 13 - Prob. 1PCh. 13 - Prob. 2PCh. 13 - Prob. 3P
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- 1 Consider a duopoly with firm 1 and firm 2. Their cost functions are 2q₁ and cq2, respectively, where 2 < c < 10. The market demand function is p=10-Q, where Q=q₁+9₂. (a) Assume that the two firms play the Bertrand price game. Find the firms' price choices in the Bertrand equilibrium. (b) Assume that the two firms play the Cournot quantity game. Find the firms' quantity choices in the Cournot equilibrium.arrow_forwardConsider whether the promises and threats made toward each other by duopolists and oligopolists are always credible (believable). Look at the figure below. Imagine that the two firms will play this game twice in sequence and that each firm claims the following policy. Each says that if both it and the other firm choose the high price in the first game, then it will also choose the high price in the second game (as a reward to the other firm for cooperating in the first game). RareAir's price strategy High Low $12 $15 A В High $12 $6 $6 $8 Low $15 $8 a. As a first step toward thinking about whether this policy is credible, consider the situation facing both firms in the second game. If each firm bases its decision on what to do in the second game entirely on the payouts facing the firms in the second game, which strategy will each firm choose in the second game? (Click to select) b. Now move one step back. Imagine that it is the start of the first game and each firm must decide what to…arrow_forwardConsider whether the promises and threats made toward each other by duopolists and oligopolists are always credible (believable). Look at the figure below. Imagine that the two firms will play this game twice in sequence and that each firm publicly proclaims the following policy. Each says that if both it and the other firm choose the high price in the first game, then it will also choose the high price in the second game (as a reward to the other firm for cooperating in the first game). (Note: Profit payoffs are shown in millions of dollars.) RareAir's price strategy High Low $12 $15 High $12 $6 C $6 $8 Low $15 $8 a. As a first step toward thinking about whether this policy is credible, consider the situation facing both firms in the second game. If each firm bases its decision on what to do in the second game entirely on the payouts facing the firms in the second game, which strategy will each firm choose in the second game? |(Click to select) b. Now move backward in time one step.…arrow_forward
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