Question 1

Over the past 20 years, the 12 members of the Organization of Petroleum Exporting Countries have made repeated attempts to restrict output in order to maintain high crude oil prices. Between 1990 and 1995, however, crude oil prices dropped by about 20 percent, due in part to increased production from the former Soviet Union, Latin America, Asia, and the North Sea. In light of these increases in oil production from non-OPEC countries, what must OPEC do to maintain the price of oil at its desired level? Do you think this will be easy for OPEC to do? Explain.

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Question 2

The inverse demand curve for a Stackelberg duopoly is P = 10,000 - 6Q. The leader's cost structure is C_L(Q_L) = 15Q_L. The follower's cost structure is C_F(Q_F) = 25Q_F. a. Determine the reaction function for the follower. b. Determine the equilibrium output levels for both the leader and the follower. c. What are the profits for the leader? For the follower?

Accepted Answer

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Question 3

When MCI announced a price discount plan designed to induce small firms to use its services, the price of its stock immediately declined. Why do you think the stock market reacted negatively to MCI's plan to attract new customers?

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Question 4

In the late 1990s, Chrysler announced a new incentive program on its minivans that included subsidized interest rates and cash allowances. Under the plan, consumers could enjoy financing rates as low as 4.9 percent, as well as a $500 cash allowance toward the lease or purchase of a new minivan. What changes in sales would you anticipate if you were the manager of a Dodge/Plymouth franchise, the official dealer of Chrysler? Why?

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Question 5

Compare and contrast the output levels and profits for the Cournot, Stackelberg, and Bertrand models. Use the following cost and demand conditions for your comparison, and suppose there are two firms: P = 1,500 - 10Q. Each firm has a marginal cost of $20 and fixed costs of zero.

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Question 6

What real-world evidence would lead you to believe that firms were acting as Cournot oligopolists? Stackelberg oligopolists? Bertrand oligopolists?

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Question 7

You are the CEO of ClipIt, a paper clip manufacturer. Your company enjoys a patented technology that allows it to produce paper clips faster and at a lower cost than your only rival, FastenIt. Clipit uses this advantage to be the first to choose its profit-maximizing output level in the market. The inverse demand function for paper clips is P = 500 - 2Q, ClipIt's costs are C_C(Q_C) = 2Q_C, and FastenIt's costs are C_F(Q_F) = 4Q_F. a. What is ClipIt's profit-maximizing output level? FastenIt's? b. What is the market's equilibrium price? c. How much profit does each firm earn? d. Ignoring antitrust considerations, would it be profitable for your firm to merge with FastenIt? If not, explain why not; if so, put together an offer that would permit you to profitably complete the merger.

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Question 8

You are the manager of a firm in a new industry. You have gotten the jump on the only other producer in the market. You know what your competitor's cost function is, and it knows yours. Your products, although different to experts, are indistinguishable to the average consumer. Your marketing research team has provided you with the following market demand curve: Q = 1,250 - .5P. Your cost function is C_A(Q_A) = 8Q_A. Your competitor's cost function is C_B(Q_B) = 6Q_B. Your diligent effort will allow you to decide how much of your product to provide and will allow you to place it on the market shortly before your competitor will be able to make its product available for sale. What output level will you choose, and what price will you charge? Explain.

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Question 9

The (inverse) demand in a Cournot duopoly is P = a - b (Q₁ + Q₂), and costs are C₁(Q₁) = c₁Q₁ and C₂(Q₂) = c₂Q₂. Show that the Cournot equilibrium levels of output are and .

Accepted Answer

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Question 10

Zelda Industries is the only firm of its kind in the world. Due largely to historical accident, it began producing streganomas in 1985 in a vacant warehouse. Virtually anyone with a degree in college chemistry could easily replicate the firm's formula, which is not patent protected. Nonetheless, since 1985 Zelda has averaged accounting profits of 6 percent on investment. This rate is comparable to the average interest rate that large banks paid on deposits over the period. Do you think Zelda is earning monopoly profits? Why?

Accepted Answer

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Question 11

The market for widgets consists of two firms that produce identical products. Competition in the market is such that each of the firms independently produces a quantity of output, and these quantities are then sold in the market at a price that is determined by the total amount produced by the two firms. Firm 2 is known to have a cost advantage over firm 1. A recent study found that the (inverse) market demand curve faced by the two firms is P = 280 - 2(Q₁ + Q₂), and costs are C₁(Q₁) = 3Q₁ and C₂(Q₂) = 2Q₂. a. Determine the marginal revenue for each firm. b. Determine the reaction function for each firm. c. How much output will each firm produce in equilibrium? d. What are the equilibrium profits for each firm?

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Question 12

Orion and Zeda are the only producers of a unique product that is sold in a market where the inverse demand curve is P = 200 - 2Q. The firms produce identical products and have identical cost functions given by C(Q_i) = 4Q_i. The managers of each firm must decide on their outputs on Monday morning and then bring products to market by noon. a. What is each firm's marginal revenue? Marginal cost? b. Equate each firm's marginal revenue to marginal cost. c. Use your result in part (b) to solve for each firm's reaction function. d. Use your results in part (c) to solve for the Cournot equilibrium levels of output for each firm.

Accepted Answer

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Question 13

You are the manager of a firm operating in a differentiated-product oligopoly. Show graphically your optimal response to an increase in marginal cost if
a. You believe rivals will follow price reductions but not price increases.
b. You believe rivals will hold output constant if you decrease output.
c. You believe rivals will follow price increases but not price decreases.

Accepted Answer

The answer of You are the manager of a firm...

Question 14

You are a potential entrant into a market that previously has had entry blocked by the government. Your market research has estimated that the inverse market demand curve for this industry is P = 22,500 - 75Q, where . You estimate that if you enter the market, your own cost function will be C_y(Q_y) = 15,300Q_y. The government has invited your firm to enter the industry, but it will require you to pay a one-time license fee of $100,000. You do not know the cost functions of the firms currently in the market; however, the price is now $16,000. Last year 87 units were sold by existing firms. Would you choose to enter this market? Explain.

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Quiz 9: Basic Oligopoly Models

When MCI announced a price discount plan designed to induce small firms to use its services, the price of its stock immediately declined. Why do you think the stock market reacted negatively to MCI's plan to attract new customers?

Compare and contrast the output levels and profits for the Cournot, Stackelberg, and Bertrand models. Use the following cost and demand conditions for your comparison, and suppose there are two firms: P = 1,500 - 10Q. Each firm has a marginal cost of $20 and fixed costs of zero.

What real-world evidence would lead you to believe that firms were acting as Cournot oligopolists? Stackelberg oligopolists? Bertrand oligopolists?

The (inverse) demand in a Cournot duopoly is P = a - b (Q1 + Q2), and costs are C1(Q1) = c1Q1 and C2(Q2) = c2Q2. Show that the Cournot equilibrium levels of output are and .

The (inverse) demand in a Cournot duopoly is P = a - b (Q₁ + Q₂), and costs are C₁(Q₁) = c₁Q₁ and C₂(Q₂) = c₂Q₂. Show that the Cournot equilibrium levels of output are and .