1. Two firms produce luxury sheepskin auto seat covers, Western Where (WW) and B.B.B. Sheep (BBBS). Each firm has a cost function given by C(q) = 30q+1.5q² 2 The market demand for these seat covers is represented by the inverse demand equation where Q=91 + 92, total output. Note: firms operate independently, and MC = P = 300-3Q Use MC = 30+ 3q₁ and MC =30+ 3q2 for when the 30+3() for when they collude. a. If each firm acts to maximize its profits, taking its rival's output as given (i.e., the firms behave as Cournot oligopolists), what will be the equilibrium quantities selected by each firm? What is total output, and what is the market price? What are the profits for each firm? b. It occurs to the managers of WW and BBBS that they could do a lot better by colluding. If the two firms collude, what will be the profit-maximizing choice of output? The industry price? The output and the profit for each firm in this case? c. The managers of these firms realize that explicit agreements to collude are illegal. Each firm must decide on its own whether to produce the Cournot quantity or the cartel quantity. To aid in making the decision, the manager of WW constructs a payoff matrix like the one below. Fill in each box with the profit of WW and the profit of BBBS. Given this payoff matrix, what output strategy is each firm likely to pursue?
1. Two firms produce luxury sheepskin auto seat covers, Western Where (WW) and B.B.B. Sheep (BBBS). Each firm has a cost function given by C(q) = 30q+1.5q² 2 The market demand for these seat covers is represented by the inverse demand equation where Q=91 + 92, total output. Note: firms operate independently, and MC = P = 300-3Q Use MC = 30+ 3q₁ and MC =30+ 3q2 for when the 30+3() for when they collude. a. If each firm acts to maximize its profits, taking its rival's output as given (i.e., the firms behave as Cournot oligopolists), what will be the equilibrium quantities selected by each firm? What is total output, and what is the market price? What are the profits for each firm? b. It occurs to the managers of WW and BBBS that they could do a lot better by colluding. If the two firms collude, what will be the profit-maximizing choice of output? The industry price? The output and the profit for each firm in this case? c. The managers of these firms realize that explicit agreements to collude are illegal. Each firm must decide on its own whether to produce the Cournot quantity or the cartel quantity. To aid in making the decision, the manager of WW constructs a payoff matrix like the one below. Fill in each box with the profit of WW and the profit of BBBS. Given this payoff matrix, what output strategy is each firm likely to pursue?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:1. Two firms produce luxury sheepskin auto seat covers, Western Where (WW) and B.B.B. Sheep
(BBBS). Each firm has a cost function given by
C(q) = 30q+1.5q²
2
The market demand for these seat covers is represented by the inverse demand equation
where Q=91
+ 92, total output. Note:
firms operate independently, and MC
=
P = 300-3Q
Use MC = 30+ 3q₁ and MC =30+ 3q2 for when the
30+3() for when they collude.
a. If each firm acts to maximize its profits, taking its rival's output as given (i.e., the firms
behave as Cournot oligopolists), what will be the equilibrium quantities selected by each
firm? What is total output, and what is the market price? What are the profits for each
firm?
b. It occurs to the managers of WW and BBBS that they could do a lot better by colluding.
If the two firms collude, what will be the profit-maximizing choice of output? The
industry price? The output and the profit for each firm in this case?
c. The managers of these firms realize that explicit agreements to collude are illegal. Each
firm must decide on its own whether to produce the Cournot quantity or the cartel
quantity. To aid in making the decision, the manager of WW constructs a payoff matrix
like the one below. Fill in each box with the profit of WW and the profit of BBBS.
Given this payoff matrix, what output strategy is each firm likely to pursue?
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