Question 1

In a Bertrand model,graphically,the intersection of all firms' best-response curves determines

Accepted Answer

In a Bertrand model, the intersection of all firms' best-response curves represents the Nash equilibrium prices, where no firm has an incentive to deviate from their price strategy given the prices of their competitors.

Question 2

Suppose the demand for pizza in a small isolated town is p = 10 - Q.The only two firms,A and B,behave as Cournot duopolists.Each has a cost function TC = 2 + Q.If the government wants to subsidize firm A to raise its output to that of a Stackelberg leader,how large should the subsidy be?

Accepted Answer

The answer of Suppose the demand for pizza in a...

Question 3

In a Bertrand model with differentiated products,

Accepted Answer

In a Bertrand model with differentiated products, firms can set price above marginal cost to capture a larger market share. This is because if one firm sets a price above marginal cost, consumers will switch to the slightly cheaper alternative offered by the other firm, leading to a price war. Therefore, firms have an incentive to set price above marginal cost to avoid a price war and increase profits.

Question 4

Suppose the demand for Pepsi-Cola is q_p = 54 - 2p_p + 1p_c.The demand for Coca-Cola is q_c = 54 - 2p_c + 1p_p.Each firm faces a constant marginal cost of zero.Determine the Bertrand equilibrium prices.What happens to the Bertrand equilibrium prices and profits if increased differentiation causes the demand for Pepsi-Cola to become q_p = 104 - 2p_p + 1p_c while the demand for Coca-Cola remains unchanged?

Accepted Answer

The answer of Suppose the demand for Pepsi-Cola is q_p...

Question 5

Two identical firms that share a market and produce a homogeneous good will find which of the following market outcomes LEAST desirable?

Accepted Answer

In a Bertrand Oligopoly, firms compete on price and as the firms are identical, this leads to a price war that drives prices down to marginal cost, resulting in zero profits for both firms. This is the least desirable outcome for the firms as they are unable to earn any profits. In contrast, in a Cournot Oligopoly or a Cartel, firms can earn positive profits.

Question 6

What happens in a duopoly if both firms try to act as the Stackelberg leader?

Accepted Answer

The answer of What happens in a duopoly if both...

Question 7

-The above figure shows the reaction functions for two pizza shops in a small isolated town.Compare the Cournot,Stackelberg,cartel,and competitive equilibria in terms of total output and welfare.

Accepted Answer

The answer of 
-The above figure shows the reaction functions...

Question 8

Product differentiation

Accepted Answer

Product differentiation allows firms to create perceived differences between their products and their competitors' products. These differences can allow firms to price their products above the competitive level if consumers value the differences enough to be willing to pay more. Additionally, product differentiation generates value for consumers as they appreciate having more choices and the ability to find products that better meet their individual preferences and needs. Therefore, all of the above options are correct.

Question 9

Two identical firms that share a market and produce a homogenous good will find the Bertrand Oligopoly LEAST attractive because

Accepted Answer

In a Bertrand Oligopoly, firms compete on price, which can lead to a price war, resulting in prices dropping to marginal cost (MC) and eroding profits. This makes it less attractive compared to a Cournot Oligopoly, where firms decide on quantities, or forming a cartel, which aims to maximize joint profits by reducing competition.

Question 10

Assuming a homogeneous product,the Bertrand duopoly equilibrium price is

Accepted Answer

In a Bertrand duopoly, firms compete on price, leading to a price equal to marginal cost if products are homogeneous and marginal costs are constant. This results in a lower equilibrium price than in the Cournot model, where firms compete on quantities, which typically results in a higher price than marginal cost.

Question 11

In a Bertrand model,market power is a function of

Accepted Answer

In a Bertrand model, firms compete on price rather than quantity, and product differentiation is what allows firms to have market power and set prices above marginal cost. Therefore, D, product differentiation, is the best choice for what determines market power.

Question 12

The Bertrand model is a more plausible model of firm behavior than the Cournot model

Accepted Answer

The Bertrand model is a more plausible model of firm behavior when firms sell a differentiated product, as they compete on the basis of price rather than quantity. In contrast, the Cournot model assumes firms compete on the basis of quantity when selling homogenous products. The Bertrand model predicts that firms will charge a price equal to their marginal cost, leading to perfect competition and zero profits in the long run. However, this prediction only holds when firms sell identical products and can easily observe their competitors' prices.

Question 13

Product differentiation allows a firm to charge a higher price because the residual demand curve facing the firm

Accepted Answer

Product differentiation creates a situation where the firm's product is perceived as unique in the market, thereby reducing the substitutability with other similar products. This gives the firm a degree of market power, which means that it can charge a higher price for its product. The residual demand curve facing the firm becomes less elastic because consumers are willing to pay a higher price for the differentiated product. Therefore, the correct answer is B, which states that the residual demand curve facing the firm is less elastic than the residual demand curve without product differentiation.

Question 14

The Bertrand model of price setting assumes that a firm chooses its price

Accepted Answer

The Bertrand model assumes that a firm chooses its price subject to what price rival firms are charging. This model predicts that in a market with homogenous products, perfectly informed buyers, and no capacity constraints, firms will set their prices equal to their marginal costs, and the resulting price will be the same as the one that would obtain under perfect competition. Thus, in this model, firms have to take into account the prices of their rivals when setting their own prices.

Question 15

Assuming a homogeneous product,the Bertrand equilibrium price is

Accepted Answer

In a Bertrand competition with homogeneous products, firms compete on price, and the equilibrium price is driven down to the level of the marginal cost, regardless of the number of firms in the market. This outcome assumes that firms have identical costs. The key insight is that even with more than one firm, the competition on price will be so fierce that prices cannot be sustained above marginal cost, as any firm attempting to do so would lose all its customers to competitors pricing at marginal cost.

Question 16

Because firms selling a homogeneous product set price in response to the (perceived)pricing decision of other firms in the Bertrand Model of oligopoly in equilibrium price exceeds marginal cost.

Accepted Answer

Because firms set price and sell a homogenous product other firms will always set price lower if a firm prices above marginal cost.In equilibrium all firms charge P = MC (same as the competitive equilibrium).

Question 17

In a Bertrand model with identical firms and a non-differentiated product,price will increase in response to

Accepted Answer

In a Bertrand model, firms compete solely on price, and because the product is non-differentiated and identical across all firms, consumers will choose the firm with the lowest price. Thus, if one firm decreases its price, it will capture a larger market share, prompting other firms to lower their price as well in order to remain competitive. This process continues until price reaches marginal cost. Therefore, an increase in marginal cost will lead to an increase in price, as firms will need to charge more in order to cover their costs. In contrast, an increase or decrease in the number of firms will not affect the equilibrium price, as long as they all have the same costs.

Question 18

Suppose the demand for pizza in a small isolated town is p = 10 - Q.There are only two firms,A and B,and each has a cost function TC = 2 + Q.Compare the firms' profits if they behave as Cournot duopolists with their profits if they form a cartel and share the market.

Accepted Answer

The answer of Suppose the demand for pizza in a...

Question 19

Suppose the demand for pizza in a small isolated town is p = 10 - Q.There are only two firms,A and B.Each has a cost function TC = 2 + Q.Determine the equilibrium quantities of each if firm A is the Stackelberg leader.

Accepted Answer

The answer of Suppose the demand for pizza in a...

Question 20

One criticism of the Bertrand pricing model is that

Accepted Answer

The Bertrand pricing model assumes perfect competition and homogeneous products, making its prediction inconsistent with reality in an oligopoly with no product differentiation. While product differentiation is a limitation of the model, it is not a criticism as the model assumes homogenous products. The predicted price is not solely a function of demand conditions, as it also considers the cost structure of the firms. The predicted price is also dependent on the number of firms, but this is not a criticism of the model.

Quiz 13: Oligopoly and Monopolistic Competition

In a Bertrand model,graphically,the intersection of all firms' best-response curves determines

Suppose the demand for pizza in a small isolated town is p = 10 - Q.The only two firms,A and B,behave as Cournot duopolists.Each has a cost function TC = 2 + Q.If the government wants to subsidize firm A to raise its output to that of a Stackelberg leader,how large should the subsidy be?

In a Bertrand model with differentiated products,

Two identical firms that share a market and produce a homogeneous good will find which of the following market outcomes LEAST desirable?

What happens in a duopoly if both firms try to act as the Stackelberg leader?

-The above figure shows the reaction functions for two pizza shops in a small isolated town.Compare the Cournot,Stackelberg,cartel,and competitive equilibria in terms of total output and welfare.

Product differentiation

Two identical firms that share a market and produce a homogenous good will find the Bertrand Oligopoly LEAST attractive because

Assuming a homogeneous product,the Bertrand duopoly equilibrium price is

In a Bertrand model,market power is a function of

The Bertrand model is a more plausible model of firm behavior than the Cournot model

Product differentiation allows a firm to charge a higher price because the residual demand curve facing the firm

The Bertrand model of price setting assumes that a firm chooses its price

Assuming a homogeneous product,the Bertrand equilibrium price is

Because firms selling a homogeneous product set price in response to the (perceived)pricing decision of other firms in the Bertrand Model of oligopoly in equilibrium price exceeds marginal cost.

In a Bertrand model with identical firms and a non-differentiated product,price will increase in response to

Suppose the demand for pizza in a small isolated town is p = 10 - Q.There are only two firms,A and B,and each has a cost function TC = 2 + Q.Compare the firms' profits if they behave as Cournot duopolists with their profits if they form a cartel and share the market.

Suppose the demand for pizza in a small isolated town is p = 10 - Q.There are only two firms,A and B.Each has a cost function TC = 2 + Q.Determine the equilibrium quantities of each if firm A is the Stackelberg leader.

One criticism of the Bertrand pricing model is that