MANAGERIAL/ECON+BUS/STR CONNECT ACCESS
9th Edition
ISBN: 2810022149537
Author: Baye
Publisher: MCG
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Question
Chapter 9, Problem 3CACQ
a.
To determine
Optimal level of output if the rival firm produces 50 units.
b.
To determine
Quantity produced by each firm in a Cournot oligopoly.
c.
To determine
Output of leader and follower in Stackelberg oligopoly.
d.
To determine
Level of output produced if markets are monopolized.
(1)
To determine
Output under collusive arrangement.
(2)
To determine
Optimal output if the rival lives up to the agreement
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QUESTION 14
Consider a oligopoly with two firms. Each firm has
constant marginal cost of 3 dollar per unit and zero fixed
costs. Suppose the market demand curve is P = 15 - Q,
where Q = Q₁ + Q₂ is the sum of the quantities
produced by both firms. Suppose each firm can produce
either 1, 2, 3, or 4 units.
Which of the following is a Nash equilibrium outcome?
Each firm produces 4 units.
Each firm produces 3 units.
Each firm produces 1 unit.
Each firm produces 2 units.
The diagram illustrate an industry under oligopoly consisting of 10 equal-sized firms, and a particular firm in that industry. Each of the firms produces an identical product.
To what output will an individual firm be restricted if the price is to be maintained?Assume that all firms are permitted to produce the same level of output.
If the other firms stick to this output, how much would an individual firm be tempted to produce if it wished to maximize its own profit at the agreed price?
If it undercut the cartel price, what and output would maximize its profit (assuming the other members did not retaliate)?
Suppose oil production in the Gulf of Mexico was a symmetric horizontal oligopoly in Cournot competition. Assume there are two producers, each with a constant marginal cost of production of $50 per barrel. Let the demand function for oil in the region be D(p) = 12000 – 20p, where demand is measured in barrels per day. (You will need to calculate inverse demand from demand before moving on).
What would the perfectly competitive equilibrium price and quantity be? What would be the consumer surplus and producer surplus?
Draw each firm’s residual inverse demand curve.
Calculate the Cournot-Nash equilibrium price and quantity. What is the total consumer surplus, total producer surplus across the two firms, and deadweight loss?
Chapter 9 Solutions
MANAGERIAL/ECON+BUS/STR CONNECT ACCESS
Ch. 9 - Prob. 1CACQCh. 9 - Prob. 2CACQCh. 9 - Prob. 3CACQCh. 9 - Prob. 4CACQCh. 9 - Prob. 5CACQCh. 9 - Prob. 6CACQCh. 9 - Prob. 7CACQCh. 9 - Prob. 8CACQCh. 9 - Prob. 9CACQCh. 9 - Prob. 10CACQ
Ch. 9 - Prob. 11PAACh. 9 - Prob. 12PAACh. 9 - Prob. 13PAACh. 9 - Prob. 14PAACh. 9 - The opening statement on the website of the...Ch. 9 - Prob. 16PAACh. 9 - Prob. 17PAACh. 9 - Prob. 18PAACh. 9 - Prob. 19PAACh. 9 - Prob. 20PAACh. 9 - Prob. 21PAACh. 9 - Prob. 22PAACh. 9 - Prob. 23PAACh. 9 - Prob. 24PAA
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- The diagram illustrates the reaction functions and isoprofit curves for a homogeneous-product duopoly in which each firm produces at constant marginal cost. a. If your rival produces 50 units of output, what is your optimal level of output? b. In equilibrium, how much will each firm produce in a Cournot oligopoly? c. In equilibrium, what is the output of the leader and follower in a Stackelberg oligopoly? d. How much output would be produced if the market were monopolized? e. Suppose you and your rival agree to a collusive arrangement in which each firm produces half of the monopoly output. (1) What is your output under the collusive arrangement? (2) What is your optimal output if you believe your rival will live up to the agreement?arrow_forwardGiven the information on the preceding graph, use the blue line (circle symbol) to graph the demand curve for the dominant firm (also known as the residual demand curve) and the black line (plus symbol) to graph the marginal revenue curve for the dominant firm on the following graph. (Hint: The slope of the marginal revenue curve is twice that of the demand curve since the demand curve is linear in this case.) Price (Dollars per box of cereal) 20 0 D MC of Dominant Firm 20 40 60 80 10 120 140 160 180 200 220 240 QUANTITY (Millions of boxes of cereal per year) DF Demand Marginal Revenue This graph also shows the dominant firm's marginal cost curve. Given that cost curve, as well as the demand and marginal revenue curves you derived, the price of a box of cereal will be $ under the price leadership model.arrow_forwardDiscuss what can be the expected result of the firms in the Cournot oligopoly, that is, that can be the expected Nash Equilibrium solution for a household cleaning appliance firm.arrow_forward
- 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?arrow_forwardSuppose the demand for a product is P = 150-Q and that the marginal cost of producing the product is $30. If two firms were initially competing in a Cournot oligopoly and then try to collude to maximize joint profits, what is the profit that firm 1 would actually get, given its best response function, assuming that firm 2 is producing the colluding quantity? (Hint: think about the "cheating" outcome)arrow_forwardA duopoly faces an inverse market demand of: p= 390 - 341 - 392. You are told that firm 1 is the leader and firm 2 is the follower. Otherwise the firms are identical, each with a constant marginal cost of $90. What oligopoly model will you use to analyze this market? The Stackelberg model At the Nash equilibrium, firm 1 will produce 60.0 units. (Round your answer to one decimal place.) At the Nash equilibrium, firm 2 will produce 30.0 units. (Round your answer to one decimal place.)arrow_forward
- What is the duopoly Nash-Cournot equilibrium if the market demand function is Q = 500 - 10p and each firm’s marginal cost is 5¢ per unit?arrow_forwardThe Bertrand model of oligopoly reveals that: capacity constraints are not important in determining market performance. perfectly competitive prices can arise in markets with only a few firms. changes in marginal cost do not affect prices. All of the statements associated with this question are true. QUESTION 2 If firms are in Cournot equilibrium: each firm could increase profits by unilaterally increasing output. each firm could increase profits by unilaterally decreasing output. firms could increase profits by jointly increasing output. firms could increase profits by jointly reducing output. OOOarrow_forward
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