Question 1

Suppose two Cournot duopolist firms operate at zero marginal cost.The market demand is p = a - bQ.Firm 1's best-response function is

Accepted Answer

In a Cournot duopoly with zero marginal cost, Firm 1's best-response function is derived by maximizing its profit given Firm 2's output. The correct best-response function is q₁ = (a - bq₂)/2b, which balances Firm 1's output with Firm 2's output to maximize profit.

Question 2

For the following, please answer "True" or "False" and explain why.
-Collusion is more successful in a game that will continue forever or in a game with an uncertain ending time,than in a game with a known ending time.

Accepted Answer

In games with a known final period players will cheat in the final period.This is true because the final period becomes a single period game.By the same reasoning,players will cheat in the period prior to the last period,etc.Thus,when players know the last period,they are more likely to cheat in each period.

Question 3

A group of firms are selling undifferentiated products if

Accepted Answer

If consumers perceive the products as identical between different firms, it means that the products are undifferentiated, regardless of production costs or whether the firms are part of a single cartel.

Question 4

Two firms sell 100% orange juice in 10 ounce bottles.The juice is only good for one week.The two firms have contracts for all the oranges produced in a large geographic area.Each firm decides how many bottles of juice to produce at the same time.This market is best described with a

Accepted Answer

The scenario describes a situation where two firms are deciding on their output levels without knowing what the other is producing. This is a classic example of a Cournot model, where firms compete on the basis of quantity rather than price. The fact that the firms have exclusive contracts for all the oranges in the region indicates that the market is not perfectly competitive, ruling out the possibility of a monopolistic competition model. The lack of differentiation of the product and absence of mention of strategic moves points towards eliminating Bertrand and Stackelberg models.

Question 5

Explain why gasoline stations across the street from each other with large signs displaying their prices may "legally" jointly set monopoly prices.

Accepted Answer

The answer of Explain why gasoline stations across the street...

Question 6

Suppose two Cournot duopolist firms operate at zero marginal cost.The market demand is p = a - bQ.Each firm will produce

Accepted Answer

In a Cournot duopoly with zero marginal cost, each firm assumes the other's quantity as given and decides its quantity to maximize its profit. The equilibrium quantity for each firm in this setup is a/3b, as the total quantity Q in the market is split between the two firms, leading to each firm producing a third of the monopolistic output.

Question 7

In the Cournot model,if a firm's marginal cost increases,its best-response function will

Accepted Answer

In the Cournot model, each firm's best response is determined by the other firm's output level and the firm's own marginal cost. If a firm's marginal cost increases, it will have higher costs for each unit of production, which will cause it to produce less at any given output level of the other firm in order to maximize its profits. Therefore, the firm's best-response function will shift inward, reflecting the lower levels of output that the firm will choose in response to the higher cost.

Question 8

The Cournot Model of Oligopoly assumes that

Accepted Answer

The Cournot Model of Oligopoly assumes that firms decide what quantity to produce, firms make their decisions simultaneously, and firms do not cooperate. Therefore, all of the above options are correct.

Question 9

If a Cournot duopolist announced that it will double its output,

Accepted Answer

In a Cournot duopoly, each firm sets its output quantity assuming that the other firm's output will remain the same. Therefore, if one firm announces that it will double its output, the other firm may not view the announcement as credible and may not change its own output. This is because the other firm has no reason to believe that the first firm will actually follow through with the announcement. As a result, the other firm may continue to produce the same quantity of output as before, and the first firm may not become the leader or cause the other firm to shut down or double its output.

Question 10

In the Cournot model,a firm maximizes profit by selecting

Accepted Answer

In the Cournot model, firms are assumed to make production decisions sequentially, taking into account the output decisions of their competitors. Each firm chooses its output to maximize its own profit, assuming that the other firms will keep their output constant. Therefore, choice A is the correct answer as it reflects the assumption made in the Cournot model.

Question 11

In the Cournot model,the output that a firm chooses to produce increases as

Accepted Answer

In the Cournot model, as the number of firms in the market decreases, each remaining firm will choose to produce more because there is less competition. This is because each firm assumes the output of its competitors as given and decides its production level accordingly. With fewer competitors, each firm has a larger share of the market, leading to an increase in its production output.

Question 12

Which of the following is NOT an assumption of the initial Cournot Oligopoly Model?

Accepted Answer

The initial Cournot Oligopoly Model assumes that firms produce homogeneous or identical products, not differentiated products.

Question 13

To determine guilt of cartelizing,the antitrust laws use

Accepted Answer

The answer of To determine guilt of cartelizing,the antitrust laws...

Question 14

Suppose that market demand can be represented as p = 100 - 2Q.There are 10 identical firms producing an undifferentiated product,each with the total cost function TC = 50 + q².Compare the competitive outcome with the cartel outcome.What is the individual firm's incentive to cheat on the cartel?

Accepted Answer

The answer of Suppose that market demand can be represented...

Question 15

If a Cournot duopolist announced that it will double its output,the other firm does not view the announcement as credible because

Accepted Answer

If the announcing firm doubles its output, it will lead to a decrease in its profits due to the lower price caused by the increase in supply. The other firm recognizes this and expects the announcing firm to not follow through with the threat. As a result, the other firm does not change its output in response.

Question 16

Suppose a market with a Cournot structure has five firms and a market price elasticity of demand equal to -2.What is a Cournot firm's Lerner Index?

Accepted Answer

The answer of Suppose a market with a Cournot structure...

Question 17

Compared to a cartel,firms in a Cournot Oligopoly

Accepted Answer

The answer of Compared to a cartel,firms in a Cournot...

Question 18

The concept of Nash equilibrium states that

Accepted Answer

Nash equilibrium states that no firm can improve their outcome holding the other firm's actions constant. This means that each firm has chosen the best strategy given what they think their competitor will do. In other words, each firm's strategy is a best response to the other firm's strategy. This does not necessarily mean that they are earning the highest possible profit.

Question 19

Which of the following will facilitate the enforcement of a cartel?

Accepted Answer

All of the above options can facilitate the enforcement of a cartel by reducing price competition and ensuring that members of the cartel are not undercutting each other's prices. Most-favored-customer clauses prevent a member of the cartel from offering better prices to certain customers, reports of bids on government contracts allow members to coordinate their bids and avoid undercutting each other, and meet the competition or price match clauses prevent members from offering lower prices to gain market share.

Question 20

For the following, please answer "True" or "False" and explain why.
-Cartels are inherently self-destructive because each member firm has the incentive to cheat on the cartel agreement.

Accepted Answer

Unless the cartel can establish mechanisms to detect and punish cheaters,the agreement will fail.

Quiz 14: Oligopoly and Monopolistic Competition