Chapter 09 - Basic Oligopoly ModelsChapter 09 Basic Oligopoly Models Multiple Choice Questions 1. The Cournot theory of oligopoly assumes rivals will A. Keep their output constant b. Increase their output whenever a firm increases its output c. Decrease output whenever a firm increases its output d. Follow the learning curve Difficulty: Easy 2. Which of the following is true? a. In Bertrand oligopoly each firm believes that their rivals will hold their output constant if it changes its output b. In Cournot oligopoly firms produce an identical product at a constant marginal cost and engage in price competition c. In oligopoly a change in marginal cost never has an affect on output or price D. None of the statements associated with this question are true Difficulty: Medium 3. In a Sweezy Oligopoly, a decrease in a firm's marginal cost generally leads to: a. Reduced output and a higher price b. Increased output and a lower price c. Higher output and a higher price D. None of the statements associated with this question are true Difficulty: Easy 9-1 Chapter 09 - Basic Oligopoly Models 4. Bertrand model of oligopoly reveals that a. Capacity constraints are not important in determining market performance B. Perfectly competitive prices can arise in markets with only a few firms c. Changes in marginal cost do not affect prices d. All of the statements associated with this question are true Difficulty: Easy 5. Which of the following are quantity setting oligopoly models? a. Stackelberg b. Cournot c. Bertrand D. Stackelberg and Cournot Difficulty: Easy 6. Which of the following are price setting oligopoly models? a. Stackelberg b. Cournot C. Bertrand d. Cournot and Stackelberg Difficulty: Easy 7. Both firms in a Cournot duopoly would enjoy higher profits if A. The firms simultaneously reduced output below the Nash equilibrium level b. Each firm simultaneously increased output above the Nash equilibrium level c. One firm reduced output below the Cournot Nash equilibrium level, while the other firm continued to produce its Cournot Nash equilibrium output d. The firms simultaneously reduced output below the Nash equilibrium level and one firm reduced output below the Cournot Nash equilibrium level, while the other firm continued to produce its Cournot Nash equilibrium output Difficulty: Hard 9-2 Chapter 09 - Basic Oligopoly Models 8. Which of the following is not a feature of Sweezy oligopoly? a. There are two firms in the market serving many consumers B. The firms produce homogenous products c. Each firm believes that rivals will cut their prices in response to a price reduction, but will not raise their prices in response to a price increase d. Barriers to entry exist Difficulty: Medium 9. Which of the following is a profitmaximizing condition for a Cournot oligopolist? A. MR = MC b. Q1 = Q2 =... = Qn c. P = MR d. All of the statements associated with this question are correct Difficulty: Medium 10. A new firm enters a market which is initially serviced by a Bertrand duopoly charging a price of $20. What will the new price be should the three firms coexist after the entry? a. $25 B. $20 c. $15 d. None of the statements associated with this question are correct Difficulty: Hard 11. "An oligopoly is an oligopoly. Firms behave the same no matter what type of oligopoly it is." This statement is: a. True B. False c. True of homogeneous product industries d. None of the statements associated with this question are correct Difficulty: Medium 9-3 ProfitA < ProfitB c. Prices of rivals as given c. Although they have different constant marginal costs. All producers have access to the same technology b." Tom and Jack do not constitute a: a. If firms compete in a Cournot fashion. QA < QB b. Consumers respond quickly to a price change c. Sweezy oligopoly b. Revenue of firm A < Revenue of firm B D. All of the statements associated with this question are correct Difficulty: Medium 9-4 . Cournot oligopoly c. Output of the rival as given b.Chapter 09 . A market is not contestable if: a. they both survive continued competition. Bertrand oligopoly Difficulty: Medium 13. PriceA < PriceB Difficulty: Easy 15.Basic Oligopoly Models 12. then each firm views the A. They compete in a homogeneous product Cournot duopoly. Stackelberg oligopoly D. Existing firms cannot respond quickly to entry by lowering their price D. "Tom and Jack are the only two local gas stations. Firm A has a higher marginal cost than firm B's. There are sunk costs Difficulty: Easy 14. Profits of rivals as given d. Which of the following results will not occur? a. it will: a. The firm competes with others in the Cournot fashion B.Basic Oligopoly Models 16. None of the statements associated with this question are correct Difficulty: Hard 17. Greater than d. Produce less output and charge a higher price than firm 2 Difficulty: Medium 9-5 . With linear demand and constant marginal cost. a. Two firms compete in a Stackelberg fashion and firm two is the leader. Less than b. Either less than or greater to Difficulty: Medium 18. Firm two views the output of firm one as given c. Which of the following is most likely? a. Other firms match price reductions but do not match price changes d. An oligopolist faces a demand curve that is steeper at higher prices than at lower prices. Firm one views the output of firm two as given b. a Stackelberg leader's profits are ___________ the follower. The firm competes with others in the Bertrand fashion Difficulty: Medium 19. All of the statements associated with this question are correct d. When firm 1 enjoys a firstmover advantage in a Stackelberg duopoly. then A. Other firms match price increases but do not match price reductions c. Produce less output and charge the same price as firm 2 d. Produce more output and charge a lower price than firm 2 B.Chapter 09 . Equal to C. Produce more output and charge the same price as firm 2 c. All of the statements associated with this question are correct Difficulty: Easy 22. Each firm could increase profits by unilaterally increasing output b. All firms that makes total industry profits constant d. Firms could increase profits by jointly increasing output D. All firms that yield the firm the same level of profit c. Profits of Firm One = profits of Firm Two c.Basic Oligopoly Models 20. Producer's surplus of Firm One = producer's surplus of Firm Two D. and the marginal costs are $1. Which of the following statement(s) is/are true? a. None of the statements associated with this question are correct Difficulty: Easy 9-6 . Cournot fashion c. Bertrand fashion D. P = $1 b. A firm that earns it the same level of profits B. The market demand in a Bertrand duopoly is P = 10 3Q. A firm's isoprofit curve is defined as the combinations of outputs produced by: a. A slight increase in the marginal cost of a firm definitely leads to a reduction in its output if the firm competes in the: a. Fixed costs are zero for both firms. Cournot fashion and Bertrand fashion Difficulty: Hard 21. Sweezy fashion b. If firms are in Cournot equilibrium: a.Chapter 09 . Firms could increase profits by jointly reducing output Difficulty: Easy 23. Each firm could increase profits by unilaterally decreasing output c. Basic Oligopoly Models 24. $4. $384 d. 8 B. The cost function for each firm is C(Q) = 4Q. $256 c. The firms produce either differentiated or homogeneous products Difficulty: Easy 9-7 . 36 Difficulty: Medium 25. $2.Chapter 09 .048 c. The cost function for each firm is C(Q) = 4Q. Two identical firms compete as a Cournot duopoly. 16 c.024 b. The cost function for each firm is C(Q) = 4Q. Barriers to entry exist c. 32 d. The market is contestable b. The equilibrium output of each firm is: a. The demand they face is P = 100 2Q. Two identical firms compete as a Cournot duopoly. A single firm (the leader) selects an output before all other firms choose their outputs d. Which of the following statements is not a condition for a Stackelberg oligopoly? A. $512 Difficulty: Medium 26. $128 B. The demand they face is P = 100 2Q. $1.096 D. the deadweight loss is: a. Each firm earns equilibrium profits of: a. In equilibrium. $512 Difficulty: Hard 27. The demand they face is P = 100 2Q. Two identical firms compete as a Cournot duopoly. The demand they face is P = 100 3Q. L = $56. Cheat by raising prices d. QF = 8 b. Profits of leader > Profits of follower b. F = $28 Difficulty: Hard 9-8 . Given that firm two commits to this collusive output. QL = 24. it pays firm one to A. F = $91 c. Profits of leader > Profits of follower and QL = 2QF Difficulty: Medium 29. The outputs of the two firms are: A. QF = 15 Difficulty: Medium 31. QL = 20. which of the following will result? a. Two firms compete as a Stackelberg duopoly. QF = 8 d. The cost function for each firm is C(Q) = 4Q. The cost function for each firm is C(Q) = 4Q. Cheat by producing a higher level of output b. None of the statements associated with this question are correct Difficulty: Medium 30. The profits of the two firms are: A. Two firms compete as a Stackelberg duopoly. The demand they face is P = 100 3Q. L = $56. QL = 16. Suppose that the duopolists competing in Cournot fashion agree to produce the collusive output. With a linear inverse demand function and the same constant marginal costs for both firms in a homogeneous product Stackelberg duopoly. QL = 2QF c. L = $384.Chapter 09 . F = $192 b. PL > PF D. L = $192. QL = 12. F = $28 d. QF = 12 c.Basic Oligopoly Models 28. Cheat by producing a lower level of output c. Basic Oligopoly Models 32. consumers have seen little relief at the pump. It is prohibited by law b. Bertrand Difficulty: Easy 33. Cournot c. Perfectly competitive firms and oligopolistic firms D. which type of oligopoly is most desirable? a. Perfect competition b. Oligopoly d. Perfectly competitive firms b. From a consumer's point of view. None of the statements associated with this question are correct Difficulty: Easy 9-9 . This phenomenon can be explained by the theory of: a. Collusion in oligopoly is difficult to achieve because: a. Since the end of the war in the Persian Gulf. The spirit of equating marginal cost with marginal revenue is not held by a.Chapter 09 . Stackelberg D. Every firm has an incentive to cheat given that others follow the agreement c. Firms usually take care of consumers' interests as a decision priority D. the world price of oil has fallen. Sweezy b. It is prohibited by law and every firm has an incentive to cheat given that others follow the agreement Difficulty: Medium 34. Monopolistic competition C. But in some areas. Monopoly Difficulty: Medium 35. Oligopolistic firms c. Stackelberg d. MCI is probably competing in a Bertrand oligopolistic industry b. Bertrand Difficulty: Easy 38. Oligopoly is the most complicated type of market structure D. MCI announced a price discount plan for small firms. Which of the following is not a type of market structure? a. Sweezy b.Basic Oligopoly Models 36. An oligopolist has a marginal revenue curve that jumps down at 500 units of output. Monopoly Difficulty: Easy 9-10 . Beliefs play an important role in oligopolistic competition b. This shows that: A. Firms do not maximize profits in oligopolistic competition c. Beliefs play an important role in oligopolistic competition and oligopoly is the most complicated type of market structure Difficulty: Easy 39. What kind of oligopoly does the firm most likely belong to? A. Stockholders are sometimes not rational c. Their stock immediately fell in price. Perfect competition C. There are many different models of oligopoly because: a. Monopolistic oligopoly d. Cournot c. AT&T sold out its stock of MCI just after the announcement Difficulty: Easy 37.Chapter 09 . There is increased demand for MCI's stock d. Monopolistic competition b. Stackelberg leader d. Which firm would you expect to make the lowest profits. prices must be above marginal cost b. None of the statements associated with this question are correct Difficulty: Medium 41. a firm's demand curve is such that other firm's match price increases but do not match price reductions. Sweezy oligopolist d.Chapter 09 . Sweezy model b. Cournot oligopolist C. Which would you expect to make the highest profits. Ed just finished an empirical study of oligopoly. All of the statements associated with this question are correct D. He found the following result: "In the examined industry. Bertrand oligopolist b.Basic Oligopoly Models 40. other things equal? a. Which of the following is true: a. prices must be above marginal cost c. If there is only one firm in a market." What kind of oligopoly is the examined industry? a. Stackelberg leader Difficulty: Medium 43. Stackelberg follower Difficulty: Medium 9-11 . other things equal: A. Stackelberg model D. Cournot oligopolist c. If there are only two firms in a market. None of the statements associated with this question are correct Difficulty: Hard 42. Cournot model c. Bertrand oligopolist b. None of the statements associated with this question are correct Difficulty: Hard 45. Firm two will produce more C. Profits of firm one will decrease Difficulty: Medium 46. None of the statements associated with this question are correct Difficulty: Hard 47. Sweezy oligopoly b. There is an increase in marginal cost for firm one. Firm two will earn more than if they compete in a Cournot fashion D. Firm one will produce less b. Heterogeneous product Bertrand oligopoly d. Firm two produces the monopoly output b. Firm one's profit is less than its profit if they compete in a Cournot fashion c. Homogeneous product Cournot oligopoly b.Basic Oligopoly Models 44.Chapter 09 . Which of the following is not true? a. Cournot oligopoly c. Firm one and firm two compete as a Cournot oligopoly. Both firm one's and firm two's reaction functions are shifted d. When firm one acts as a Stackelberg leader: a. Two firms produce different goods. Firm one has a positivesloped reaction function. This can be explained best by a. A duopoly in which both firms have a Lerner index of monopoly power equal to 0 is probably a: a. Stackelberg oligopoly D. Homogeneous product Bertrand oligopoly C. Bertrand oligopoly Difficulty: Medium 9-12 . Greater than t times the total output of the two firms should there be no sales tax d.Basic Oligopoly Models 48. Rivals will increase their output whenever a firm increases its output c.Chapter 09 . Demand decreases by t C. and costs are C1(Q1) = c1Q1 and C2(Q2) = c2Q2. The Government has imposed a per unit tax of $t on each unit sold by each firm. Cournot oligopoly c. Firms set prices b. Demand increases by t b. The inverse demand in a Cournot duopoly is P = a b (Q1 + Q2). The government has imposed a per unit tax of $t on each unit sold by each firm. Sweezy oligopoly b. Stackelberg oligopoly D. Marginal cost decreases by t Difficulty: Hard 49. The tax revenue is: a. The inverse demand in a Cournot duopoly is P = a b (Q1 + Q2). and costs are C1(Q1) = c1Q1 and C2(Q2) = c2Q2. None of the statements associated with this question are correct Difficulty: Medium 50. The producer's surplus of all firms in an oligopoly is usually the least in the case of a: a. The equilibrium output of each firm is the same as a situation where each firm's: a. Marginal cost increases by t d. Rivals will decrease output whenever a firm decreases its output d. Bertrand oligopoly Difficulty: Easy 51. The Bertrand theory of oligopoly assumes A. Less than t times the total output of the two firms should there be no sales tax c. Rivals will follow the learning curve Difficulty: Easy 9-13 . T times the total output of the two firms should there be no sales tax B. All of the above are quantity setting models Difficulty: Easy 9-14 .Chapter 09 . In Cournot oligopoly firms engage in quantity competition c. In Bertrand oligopoly each firm reacts optimally to price changes b. Higher output and a higher price D. Bertrand d. The Sweezy model of oligopoly reveals that a. In Sweezy oligopoly a change in marginal cost may not have an effect on output or price D. In a Cournot oligopoly. Reduced output and a higher price b. Which of the following is true? a. Changes in marginal cost may not affect prices d. Stackelberg b. Which of the following is not a quantitysetting oligopoly model? a. Higher output and a lower price Difficulty: Easy 54. All of the statements associated with this question are correct Difficulty: Medium 53. Cournot C. Capacity constraints are not important in determining market performance b. All of the statements associated with this question are correct Difficulty: Easy 55. Reduced output and a lower price c. a decrease in a firm's marginal cost leads to a.Basic Oligopoly Models 52. Perfectly competitive prices can arise in markets with only a few firms C. Both firms in a Cournot duopoly would experience lower profits if A. Monopoly Difficulty: Easy 57. There is a single firm in the market serving many consumers and the market price is equal to marginal cost Difficulty: Medium 9-15 . while the other firm continued to produce its Cournot Nash equilibrium output Difficulty: Hard 58. One firm reduced output below the Cournot Nash equilibrium level. which of the following market structures generally leads to the highest price? a.Basic Oligopoly Models 56.Chapter 09 . Each firm simultaneously increased output above the Nash equilibrium level c. The market price is equal to marginal cost D. There is a single firm in the market serving many consumers c. There was an increase in marginal production costs b. There was an increase in marginal production costs and ne firm reduced output below the Cournot Nash equilibrium level. There are several firms in the market serving many consumers b. Stackelberg b. In the presence of large sunk costs. Bertrand D. Which of the following is a feature of a contestable market? a. Cournot c. while the other firm continued to produce its Cournot Nash equilibrium output d. Which of the following is true of a perfectly contestable market? A. P > MC c. P = MC b. P < ATC d.Basic Oligopoly Models 59. P > MC and P < ATC Difficulty: Medium 9-16 .Chapter 09 . $20 B. Firms behave the same no matter what type of oligopoly it is. Are greater than those of a Sweezy oligopolist Difficulty: Hard 9-17 . Bertrand and Cournot oligopolies b. What will the new market price be should the three firms coexist after the entry? a. Are greater than those of the follower b. A Bertrand oligopoly d. Are less than those of the follower d. Sue and Jane constitute a. None of the statements associated with this question are correct Difficulty: Hard 61. Sue and Jane own two local gas stations. None of the statements associated with this question are correct Difficulty: Medium 63. Below $20 c. "An oligopoly is an oligopoly. Cournot and Stackelberg oligopolies c. A Sweezy oligopoly b. Equal those of the follower c. Above $20 d.Chapter 09 ." This statement is true of: a. but earn zero economic profits. A new firm enters a market which is initially serviced by a Cournot duopoly charging a price of $20. Bertrand and Stackelberg oligopolies D. They have identical constant marginal costs.Basic Oligopoly Models 60. The profits of the leader in a Stackelberg duopoly A. A Cournot oligopoly C. None of the statements associated with this question are correct Difficulty: Medium 62. Which of the following are not price setting oligopoly models? a. Bertrand D.Chapter 09 . The Cournot theory of oligopoly is based on the assumption that each firm believes that rivals will A. An important condition for a contestable market is: a. There are high transaction costs C. In Sweezy oligopoly markets each firm believes rivals will cut their prices in response to a price reduction. Stackelberg and Cournot Difficulty: Easy 9-18 . Decrease their output whenever it increases its output d. Keep their output constant if it changes its output b. Which of the following is true? a. In Bertrand oligopoly markets each firm believes that their rivals will hold their output constant if it changes its output b. Randomly change output whenever it changes its output Difficulty: Easy 66. Increase their output whenever it increases its output c.Basic Oligopoly Models 64. Stackelberg b. In oligopoly market a change in marginal cost never has an affect on output or price Difficulty: Medium 67. In Cournot oligopoly market firms produce an identical product at a constant marginal cost and engage in price competition C. Existing firms cannot respond quickly to entry by lowering their price d. but will not raise prices in response to price increases d. Cournot c. There are sunk costs Difficulty: Easy 65. All producers have different technologies b. Above $30 b. Assuming that the new firm is equally as efficient as the incumbent firms. There are sunk costs Difficulty: Easy 70. Unable to tell given the information provided Difficulty: Easy 69. Revenue of firm A < Revenue of firm B d. One of the characteristics of a contestable market is that a. P = $3 b. P = $15 d. A new firm enters a market which is initially serviced by a Bertrand duopoly charging a price of $30. P = $10 c. None of the statements associated with this question are correct Difficulty: Easy 9-19 . They compete in a homogeneous product Cournot duopoly. Below $30 C. The market demand in a Bertrand duopoly is P = 15 4Q. Consumers react quickly to a price change c. QA > QB b. All firms have different productive technology B.Basic Oligopoly Models 68. Firm A has a higher marginal cost than firm B. ProfitA < ProfitB c. Fixed costs are zero for both firms.Chapter 09 . Which of the following statement(s) is/are true? A. Existing firms respond quickly to entry by lowering their price d. and the marginal costs are $3. PriceA = PriceB Difficulty: Easy 71. what will the new price be should the three firms coexist after the entry? a. Equal to $30 d. Which of the following results will not occur? A. QF = 24 b. The cost function for each firm is C(Q) = 8Q. The outputs of the two firms are: a. Two firms compete as a Stackelberg duopoly. QF = 6 C. QL = 35. QL = 48. The profits of the follower in a Stackelberg duopoly a. The inverse market demand they face is P = 80 4Q. The firms produce differentiated products c. There are a few firms in the market serving many consumers b. QF = 3 d. $56 Difficulty: Medium 73. but will not raise their prices in response to a price increase D. Which of the following is not a feature of Sweezy oligopoly? a. None of the statements associated with this question are correct Difficulty: Medium 74. The cost function for each firm is C(Q) = 8Q.5Q. $32 c. Each firm believes that rivals will cut their prices in response to a price reduction. All the statements associated with this question are correct Difficulty: Easy 9-20 . Equal those of the leader C. $12 B. Are less than those of the leader d. Two identical firms compete as a Cournot duopoly. $48 d.Chapter 09 .Basic Oligopoly Models 72. The price charged in this market will be a. Free entry and exit occurs in the market Difficulty: Easy 75. QL = 6. The inverse market demand they face is P = 62 4. Are greater than those of the leader b. MR1(Q1.Basic Oligopoly Models 76. Based on this information firm 1 and 2's marginal revenue functions are a. Jointly increasing output B.5 0.Q2) = 100 2Q1 Q2 and MR2(Q1. Cheat by raising prices d. MR1(Q1.5Q2 and MR2(Q1. Firms do not maximize profits in oligopolistic competition C. Oligopoly is the most complicated type of market structure d. Cheat by producing more output b.5Q1 Difficulty: Medium 9-21 . Beliefs are not incorporated in oligopolistic competition b. it pays firm two to A. Both a and c Difficulty: Easy 79. Suppose that the duopolists competing in Cournot fashion agree to produce the collusive output.Q2) = 100 2Q1 4Q2 c. MR1(Q1.Q2) = 100 2Q1 4Q2 and MR2(Q1. Jointly reducing output c. Given that firm one commits to this collusive output. Unilaterally reducing prices Difficulty: Easy 77. they could increase profits by a.Q2) = 100 4Q1 2Q2 and MR2(Q1.Q2) = 24. If firms are in Cournot equilibrium. Cheat by producing less output c. MR1(Q1.Q2) = 100 4Q1 2Q2 d. Consider a Cournot duopoly with the following inverse demand function: P = 100 2Q1 2Q2. There are many different models of oligopoly because: a.Chapter 09 .Q2) = 24.Q2) = 100 Q1 2Q2 B.5 0. The firms' marginal cost are identical and given by MCi(Qi) = 2Qi. None of the statements associated with this question are correct Difficulty: Hard 78. Unilaterally increasing prices d. Q1 = 49 0. $2. The firms' marginal cost are identical and given by MCi(Qi) = 2Qi.25Q1 Difficulty: Medium 81.5 0. r1(Q2) = 24.Chapter 09 .5Q1 c. Consider a Cournot duopoly with the following inverse demand function: P = 100 2Q1 2Q2. MR(QF) = 100 2QF + c1 d.134. Q1 = 49 0. r1(Q2) = 24. Consider a Stackelberg duopoly with the following inverse demand function: P = 100 2Q1 2Q2.5Q1 d. $16. $1. Based on this information firm 1 and 2's reaction functions are a.5 0. Based on this information the Stackelberg leader's marginal revenue function is a. The firms' marginal cost are identical and given by MCi(Qi) = 2Qi. MR(QL) = 50 2QL + c1 B.5 0.5Q2 B. Consider a Cournot duopoly with the following inverse demand function: P = 100 2Q1 2Q2.67 c. The firms' marginal cost are identical and given by MCi(Qi) = 2Qi.22 Difficulty: Hard 82.5Q1 and r2(Q1) = 24. $32. Based on this information consumer surplus in this market is a.33 b.25Q2 and Q2 = 49 0.11 D.067. MR(QL) = 50 2QL + c2 c.5Q2 and r1(Q2) = 24. MR(QF) = 100 QF + c2 Difficulty: Hard 9-22 .5Q2 and Q2 = 49 0.5 0.Basic Oligopoly Models 80. QF) = 100 4QL 2QF c.5 0.QF) = 100 2QL QF d. MRF(QL.5 0. QL = 49 0. QF = 24. The firms' marginal cost are identical and given by MCi(Qi) = 2Qi. Consider a Stackelberg duopoly with the following inverse demand function: P = 100 2Q1 2Q2. QL = 24. QF = 24. MRF(QL. QL = 50 0.QF) = 100 2QL 4QF b. The firms' marginal cost are identical and given by MCi(Qi) = 2Qi.Chapter 09 .QF) = 100 QL 2QF Difficulty: Medium 84. The firms' marginal cost are identical and given by MCi(Qi) = 2Qi. QF = 49 0.5 0. Based on this information the Stackelberg leader's reaction function is a.5 QL Difficulty: Medium 85. Consider a Stackelberg duopoly with the following inverse demand function: P = 100 2Q1 2Q2.Basic Oligopoly Models 83. MRF(QL.25QL b. Based on this information the Stackelberg follower's marginal revenue function is A.5QF c. None of the statements associated with this question are correct Difficulty: Easy 9-23 . QF = 24. Consider a Stackelberg duopoly with the following inverse demand function: P = 100 2Q1 2Q2. MRF(QL. Based on this information the Stackelberg follower's reaction function is a.5QF b.25QF C.5QL d.5QF D. $36. The inverse demand curve is given by P = 6 Q.80 Difficulty: Hard 87. $73. 2 units. 2 units. profits of $6 b. a. losses of $6 Difficulty: Medium 88.352. The firms' marginal cost are identical and given by MCi(Qi) = 2Qi.704. losses of $2 D.Chapter 09 .75 b. $1. then consumer surplus in this market is a.50 C. Consider two firms competing to sell a homogeneous product by setting price.Basic Oligopoly Models 86. There is insufficient information to determine consumer surplus in this market Difficulty: Medium 9-24 . $8 d. $2. If each firms' cost function is Ci(Qi) = 6 + 2Qi. The inverse demand curve is given by P = 6 Q. 4 units. If each firms' cost function is Ci(Qi) = 2Qi.40 d. Consider two firms competing to sell a homogeneous product by setting price. profits of $2 c. then each firm will symmetrically produce units of output and earn. 4 units. Consider a Stackelberg duopoly with the following inverse demand function: P = 100 2Q1 2Q2. $4 C. $2 b. Based on this information the consumer surplus in this market is a. $1. An upward shift in firm 2's reaction function resulting in a new Cournot equilibrium where firm 1 is producing a lower quantity and firm 2 is producing a higher quantity Difficulty: Hard 9-25 . A decrease in firm 1's marginal cost will cause a. Firm 1 has MC1(Q1) = 1 and firm 2 has MC2(Q2) = 1. An upward shift in firm 1's reaction function resulting in a new Cournot equilibrium where firm 1 is producing a higher quantity and firm 2 is producing a lower quantity c. A downward shift is firm 2's reaction function resulting in a new Cournot equilibrium where firm 1 is producing a higher quantity and firm 2 is producing a lower quantity d. A downward shift is firm 2's reaction function resulting in a new Cournot equilibrium where firm 1 is producing a higher quantity and firm 2 is producing a lower quantity d.Chapter 09 .975 units C. Consider two firms competing to sell a homogeneous product by setting price.05. A downward shift in firm 1's reaction function resulting in a new Cournot equilibrium where firm 1 is producing a lower quantity and firm 2 is producing a higher quantity B.96 units and firm 2 will produce 0 units d. $1 and each firm will produce 7 units b. A downward shift in firm 1's reaction function resulting in a new Cournot equilibrium where firm 1 is producing a lower quantity and firm 2 is producing a higher quantity b. The inverse demand curve is given by P = 15 Q.05 and each firm will produce 6.Basic Oligopoly Models 89. $1 and firm 1 will produce 14 units and firm 2 will produce 0 units Difficulty: Hard 90. An increase in firm 2's marginal cost will cause a. An upward shift in firm 2's reaction function resulting in a new Cournot equilibrium where firm 1 is producing a lower quantity and firm 2 is producing a higher quantity Difficulty: Hard 91. Based on this information we can conclude that the market price will be a. An upward shift in firm 1's reaction function resulting in a new Cournot equilibrium where firm 1 is producing a higher quantity and firm 2 is producing a lower quantity C.04 and firm 1 will produce 13. $1. PCollusion < PCournot < PStackelberg < PBertrand d. QBertrand < QCollusion < QCournot < QStackelberg d. Consider a market consisting of two firms where the inverse demand curve is given by P = 500 2Q1 2Q2. PBertrand < PCournot < PStackelberg < PCollusion Difficulty: Easy 9-26 . QCollusion < QCournot < QStackelberg < QBertrand c. CSBertrand > CSStackelberg > CSCournot > CSCollusion c. QBertrand < QStackelberg < QCournot < QCollusion Difficulty: Medium 94. Consider a market consisting of two firms where the inverse demand curve is given by P = 500 2Q1 2Q2.Chapter 09 . Based on this information we can conclude that equilibrium price in the different oligopoly models will follow which of the following orderings. A. Each firm has a marginal cost of $50. Based on this information we can conclude that aggregate quantity in the different equilibrium oligopoly models will follow which of the following orderings. CSStackelberg > CSBertrand > CSCournot > CSCollusion Difficulty: Medium 93. a. QCollusion < QStackelberg < QCournot < QBertrand B. Consider a market consisting of two firms where the inverse demand curve is given by P = 500 2Q1 2Q2. PStackelberg < PCollusion < PCournot < PBertrand c. PBertrand < PStackelberg < PCournot < PCollusion b.Basic Oligopoly Models 92. Each firm has a marginal cost of $50. a. Based on this information we can conclude that consumer surplus in the different equilibrium oligopoly models will follow which of the following orderings. Each firm has a marginal cost of $50. CSCollusion > CSStackelberg > CSCournot > CSBertrand B. CSBertrand > CSCournot > CSStackelberg > CSCollusion d. Solving for Q gives us industry output of 2. To find industry output. P = MC = $5. If you were the manager. b.Basic Oligopoly Models 95. Suppose you are the manager of a mediumsized firm that operates in an industry that has a fourfirm concentration ratio of 100 percent. a. In order to determine your firm's optimal output and price. the market for compact discs has evolved as follows. Based on this information we can conclude that aggregate profits in the different equilibrium oligopoly models will follow which of the following orderings. Solve for the Bertrand equilibrium price and market output. There are two firms that each use a marquee to post the price they charge for compact discs. In Gelate. Would your answer differ if the products were not perfect substitutes? Explain. a. otherwise they sell nothing.00 per disc.Chapter 09 . firms are forced to charge a price equal to marginal cost. 97. Collusion > Stackelberg > Cournot > Bertand d. All firms in the industry are of equal size. However. b. Pennsylvania. Consider a market consisting of two firms where the inverse demand curve is given by P = 500 2Q1 2Q2. 9-27 . we find Q such that P = 5 = 10 2Q. None of the statements associated with question are correct Difficulty: Medium Essay Questions 96. you must obtain information about how rivals would respond to changes in your decisions. When goods are perfect substitutes. if consumers view the goods as heterogeneous (differentiated products) a firm does not loose the entire market if it prices above another firm's price. The inverse market demand in their area is given by . Bertand > Collusion > Stackelberg > Cournot B.5 units. how would you obtain this information? One method would be to study the history of how rivals responded to changes in your past pricing policies. Each firm buys CDs from the same supplier at a cost of $5. a. Collusion > Cournot > Stackelberg > Bertand c. Each firm has a marginal cost of $50. where Q is the total output produced by the two firms. Chapter 09 . Show graphically your optimal response to an increase in marginal cost if a. You believe rivals will follow price increases but not price decreases. You believe rivals will follow price reductions but not price increases. You are the manager of a firm operating in a differentiatedproduct oligopoly. c. You believe rivals will hold output constant if you decrease output. b. 9-28 .Basic Oligopoly Models 98. the demand curve is ABC in Figure 93c.Basic Oligopoly Models a. In this case. Thus. your output will remain at Q. the profitmaximizing level of output will fall. Figure 93b c. Figure 93c 9-29 . In this case. the initial Cournot equilibrium is given by point A in Figure 93b. In this case. the demand function for a Sweezy oligopolist is given by ABC in Figure 93a. and marginal revenue curve is ADEF.Chapter 09 . An increase in marginal cost from MC to MC* leads to a reduction in the profitmaximizing level of output. Figure 93a b. An increase in firm one's marginal cost results in a new Cournot equilibrium at point B. the manager of firm one should reduce output to maximize profits. while MR is ADEF. So long as marginal cost changes by a small amount. For large increases in MC. The (inverse) demand in a Cournot duopoly is and and cost are . This yields a reaction function for firm one of Similarly.Chapter 09 . equating MR = MC for firm two yields a b (Q1 + Q2) bQ2 = c2.Basic Oligopoly Models 99. 9-30 . so two's reaction function is Solving these two equations simultaneously gives us the desired result. Show that the Cournot equilibrium levels of output are and . Equating MR = MC for firm one yields a b (Q1 + Q2) bQ1 = c1. The market for widgets consists of two firms that produce identical products. 9-31 .5) = $4. 1 = 95(46) 3(46) = $4. Determine the reaction function for each firm. b. Competition in the market is such that each of the firms independently produces a quantity of output. Why do you think the stock market reacted negatively to MCI's plan to attract new customers? The most likely reason the market did not respond favorably to MCI's plan is that investors recognized the market for longdistance services is oligopolistic. the reaction function of firm one is r1(Q2) = 69.232. the price of its stock immediately declined. Solving Q1 and Q2 from the two reaction functions.5) 2(46. Firm two will produce such that MR2 = MC2. c.5Q2. and these quantities are then sold in the market at a price that is determined by the total amount produced by the two firms. 101.5.25 . Thus. or 280 2Q2 4Q1 = 3. b. 6 days after the MCI announcement. c. How much output will each firm produce in equilibrium? d. MR1 = 280 2Q2 4Q1 and MR2 = 280 2Q1 4Q2. In fact.5 .Chapter 09 . The reaction function for firm two is thus r2(Q1) = 69. Firm 2 is known to have a cost advantage over Firm 1.324. What are the equilibrium profits for each firm? . 2 = 95(46. Effectively.5Q1. a. When MCI announced a price discount plan designed to induce small firms to use its services. Determine the marginal revenue for each firm. AT&T followed with a similar plan. competitors like AT&T would likely react to MCI's plan by changing their own pricing structure. MCI's action initiated a "price war" that parallels our analysis of Bertrand competition. A recent study found that the (inverse) market demand curve faced by the two firms is and costs are and a. we have d.Basic Oligopoly Models 100. or 280 2Q1 + 4Q2 = 2. Firm one will produce such that MR1 = MC1. this is precisely what did happen. 081. b. QF = 831. which is not patent protected. Determine the reaction function for the follower. Determine the equilibrium output levels for both the leader and the follower. F = $1. Zelda could have invested funds over the period at 6 percent. The inverse demand curve for a Stackelberg duopoly is .5. The follower's cost structure is . the price of output is given by P = 10.25 . a.5(832. it began producing streganomas in 1985 in a vacant warehouse.9) 15(832. b. What are the profits for the leader? For the follower? a. Therefore.000 6(832. Do you think Zelda is earning monopoly profits? Why? No.25 . What realworld evidence would lead you to believe that firms were acting as Cournot oligopolists? Stackelberg oligopolists? Bertrand oligopolists? Evidence of Cournot oligopoly would be a situation where firms make quantitysetting decisions. Virtually anyone with a degree in college chemistry could easily replicate the firm's formula. c. Most likely. The leader's cost structure is .513. 103. Zelda Industries is the only firm of its kind in the world. with low prices and profits.354.8. and is disciplined by the threat of entry by other firms. The follower's reaction function is QF = 831. Due largely to historical accident. This rate is comparable to the average interest rate that large banks paid on deposits over the period. Evidence of Bertrand oligopoly would be severe price competition.8) = $2. Nonetheless.9 + 414. L = 2513.Chapter 09 . 104.Basic Oligopoly Models 102.8 units.032. Evidence of Stackelberg behavior includes one firm setting output prior to other firms in the market.9) = $2. In fact. Zelda cannot charge prices in excess of marginal cost.9) = 414.250. The leader's output is Similarly.5QL. Zelda operates in a contestable market. c. since 1985 Zelda has averaged accounting profits of 6 percent on investment.2. 9-32 . Thus.8(832. Its accounting profits of 6 percent translate into zero economic profits. who take the leader's output as given. 5P) into the corresponding inverse demand function. but it will require you to pay a onetime license fee of $100. You have gotten the jump on the only other producer in the market. and what price will you charge? Explain. Your products. it would not pay to enter the industry if you expect rivals to maintain their present output. Thus. however. Would you choose to enter this market? Explain. your inverse demand function remains at P = 22.25) = $630.5(622. your own cost function will be .25. The corresponding price is P = 22. You do not know the cost functions of the firms presently in the market.Chapter 09 .637. You know what your competitor's cost function is. the price of output will be P = 2500 2(622.5QA = [2500 6]/4 . 106. Your competitor's cost function is .481. and it knows yours.5) 15. Your market research has estimated that the inverse market demand curve for this industry is . To do this. the price is now $16. Your marketing research team has provided you with the following market demand curve: . What output level will you choose. assuming existing firms hold output constant: Qy = 4. where .975 150 Qy = 15. and should set the Stackelberg output to maximize your profits. Based on this inverse demand function. This is given by the formula QA = (a + cB 2cA)/2b = (2500 + 6 2(8))/4 = 622. Your diligent effort will allow you to decide how much of your product to provide and allow you to place it on the market shortly before your competitor will be able to make its product available for sale.25 units.5 units.300.50. are indistinguishable to the average consumer.500 75(87) 75Qy = 15. You are a potential entrant into a market that previously has had entry blocked by the government. although different to experts.5) = $15. Equating MR = MC yields 15.000 = $98. To use the formulas in the text.5) = 312.5. In this case.637.975 75Qy.5) 100. Your cost function is .5 +312. The government has invited your firm to enter the industry. Solving for Qy yields the profit maximizing output by the entrant. you first need to convert the given demand equation (Q = 1250 .000.5(4. You are clearly a Stackelberg leader. You are the manager of a firm in a new industry. Profits if you enter (net of the license fee) are $15.Basic Oligopoly Models 105. solve the given demand equation for P to get P = 2500 2Q.5 units. use the formula in the text to solve for your Stackelberg output as the leader.000. You estimate that if you enter the market. 9-33 .300(4.500 75(87 + 4. Last year 87 units were sold by existing firms. The follower will produce QB = (a cB)/2b . Thus. Asia. and the North Sea. due in part to increased production from the former Soviet Union. each firm has an incentive to cheat on collusive agreements. Each firm has a marginal cost of $20 and fixed 108. Use the following cost and demand conditions for your comparison. This will be difficult for OPEC to do. OPEC must decrease its total quantity of oil produced by the amount that nonOPEC countries increase their oil production. even in the absence of changing demand or cost conditions. old collusive agreements no long suit the new environment. crude oil prices have dropped by about 20 percent. . and Bertrand models. Between 1990 and 1995. and suppose there are two firms: costs of zero. 9-34 .Chapter 09 . In light of these increases in oil production from nonOPEC countries. Latin America. the 12 members of the Organization of Petroleum and Exporting Countries have made repeated attempts to restrict output in order to maintain high crude oil prices. Compare and contrast the output levels and profits for the Cournot. Moreover. Over the past 20 years. 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. as shown in the text. As demand and cost conditions change. Stackelberg.Basic Oligopoly Models 107. however. Use your results in part (c) to solve for the Cournot equilibrium levels of output for each firm. Substituting qz into qo from part (c) yields an equilibrium output for Orion of 32. MRO = 200 4qo 2qz.Basic Oligopoly Models 109. Under the plan. Likewise.9 percent. equilibrium output for Zeda is 32. a. b. your sales would rise. MRz = MCz 200 2qo 4qz = 4.7 units. 110. However. MRz = 200 2qo 4qz . as well as a $500 cash allowance toward the lease or purchase of a new minivan. Chrysler announced a new incentive program on its minivans that included subsidized interest rates and cash allowances. What changes in sales would you anticipate if you were the manager of a Dodge/Plymouth franchise? Why? Other things equal. What is each firm's marginal revenue? Marginal cost? b. MRO = MCO 200 4qo 2qz = 4. c. In the late 1990s. c. Use your result in part (b) to solve for each firm's reaction function. The managers of each firm must decide on their outputs on Monday morning and then bring products to market by noon. which will mitigate to some extent the sales increase you otherwise would have enjoyed. Equate each firm's marginal revenue to marginal cost. substituting qo into qz from part (c). 9-35 .MCO = MCz = 4. The firms produce identical products and have identical cost functions given by . given the oligopolistic nature of the industry.Chapter 09 .7 units. d. Orion and Zeda are the only producers of a unique product that sold in a market where the inverse demand curve is . consumers could enjoy financing rates as low as 4. you should anticipate that automakers like General Motors and Ford will likely counter with similar incentive programs. a. and d. 000. Assuming that the merged firms adopted ClipIt's patented technology that allows it to produce at a lower cost of CC(QC) = 2QC. b. How much profit does each firm earn? d.Chapter 09 . c. a paper clip manufacturer. The inverse demand function for paper clips is . ClipIt's costs are . Ignoring antitrust considerations.Basic Oligopoly Models 111. a. would it be profitable for your firm to merge with FastenIt? If not. if so. Stackelberg follower's profit maximizing quantity is 61. d. explain why not. Your company enjoys a patented technology that allows it to produce paper clips faster and at a lower cost than your only rival. 9-36 . You are the CEO of ClipIt. What is ClipIt's profitmaximizing output level? FastenIt's? b. a merger would be profitable. Profits of the merged firm would be $30.50 when firms compete in a Stackelberg setting.50 compared to joint (industry) profits of $23. a. Clipit uses this advantage to be the first to choose its profitmaximizing output level in the market.5 units. What is the market's equilibrium price? c.189. P = $127. put together an offer that would permit you to profitably complete the merger. and FastenIt's costs are . Stackelberg leader's profitmaximizing quantity is 125 units. FastenIt.00.