Economics: Principles, Problems, & Policies (McGraw-Hill Series in Economics) - Standalone book
20th Edition
ISBN: 9780078021756
Author: McConnell, Campbell R.; Brue, Stanley L.; Flynn Dr., Sean Masaki
Publisher: McGraw-Hill Education
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Chapter 13.A, Problem 1AP
To determine
The punishment strategy for the cheating firm.
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Consider a “punishment” variation of the two-firm oligopoly situation shown in Figure 14.1. Suppose that if one firm sets a low price while the other sets a high price, then the firm setting the high price can fine the firm setting the low price. Suppose that whenever a fine is imposed, X dollars is taken from the low-price firm and given to the high-price firm. What is the smallest amount that the fine X can be such that both firms will want to always set the high price?
2
Consider a Cournot oligopoly with n = 2 firms. Firm 1 cost function is TC₁ (9₁) = 20 + 12q₁ + q²,
while firm 2 cost function is TC₂ (9₂) = 50 +8q2 + q2 . The total market demand is P(Q) = 50 — 2Q,
where Q is the total quantity produced by all (active) firms in the industry.
a- Compute the Cournot equilibrium total quantity, price, quantity for each firm, and profit for
each firm. Which firm is making higher profits?
b- Consider the situation in which a third firm (firm 3) enters the market. What is the total
equilibrium quantity, price, quantity and profit for each firm if TC3 = TC₁? [hint: q₁ and q3 will
be the same, since 1 and 3 are identical]
c- How would your answer at point b change if instead TC3 = TC₂? Would consumers prefer firm
3 to enter with the total cost of firm 1 or firm 2?
d- What would be the highest one-time cost that firm 3 would be willing to pay to enter the
market and then compete in a Cournot game with total cost equal to firm 1?
Chapter 13 Solutions
Economics: Principles, Problems, & Policies (McGraw-Hill Series in Economics) - Standalone book
Ch. 13.1 - Prob. 1QQCh. 13.1 - Prob. 2QQCh. 13.1 - Prob. 3QQCh. 13.1 - Prob. 4QQCh. 13.4 - Prob. 1QQCh. 13.4 - The D2e segment of the demand curve D2eD1 graph...Ch. 13.4 - Prob. 3QQCh. 13.4 - Prob. 4QQCh. 13.A - Prob. 1ADQCh. 13.A - Prob. 2ADQ
Ch. 13.A - Prob. 3ADQCh. 13.A - Prob. 4ADQCh. 13.A - Prob. 1ARQCh. 13.A - Prob. 2ARQCh. 13.A - Prob. 3ARQCh. 13.A - Prob. 1APCh. 13.A - Prob. 2APCh. 13 - Prob. 1DQCh. 13 - Prob. 2DQCh. 13 - Prob. 3DQCh. 13 - Prob. 4DQCh. 13 - Prob. 5DQCh. 13 - Prob. 6DQCh. 13 - Prob. 7DQCh. 13 - Prob. 8DQCh. 13 - Prob. 9DQCh. 13 - Prob. 10DQCh. 13 - Prob. 11DQCh. 13 - Prob. 12DQCh. 13 - Prob. 13DQCh. 13 - Prob. 1RQCh. 13 - Prob. 2RQCh. 13 - Prob. 3RQCh. 13 - Prob. 4RQCh. 13 - Prob. 5RQCh. 13 - Prob. 6RQCh. 13 - Prob. 7RQCh. 13 - Prob. 8RQCh. 13 - Prob. 1PCh. 13 - Prob. 2PCh. 13 - Prob. 3P
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- Consider a "punishment" variation of the two-firm oligopoly situation shown in the figure below. Suppose that if one firm sets a low price while the other sets a high price, then the firm setting the high price can fine the firm setting the low price. Suppose that whenever a fine is imposed, X dollars are taken from the low-price firm and given to the high-price firm. RareAir's price strategy High Low $12 $15 A B High $12 $6 $6 $8 Low $15 $8 Instructions: Enter your answer as a whole number. What is the smallest amount that the fine X can be such that both firms will want to always set the high price? $O million Uptown's price strategyarrow_forwardSuppose the inverse demand for a particular good is given by P = 1200-12Q. Furthermore, there are only two firms, A and B. Firm A's marginal cost is a constant $25, and Firm B's marginal cost is a constant $20. Assume these two firms engage in Cournot competition. If we assume that the firm with the lowest costs could supply the entire market, then the deadweight loss due to the market power these two firms exert through Cournot competition equals $. 4 [Round your answer to the nearest two decimals.]arrow_forwardConsider the following statements about the Stackelberg game from the slides, assuming both firms are identical: (I) Denote by qC the Cournot equilibrium quantity produced by each firm, and by qPC the competitive quantity defined by P(qPC) = c (price equals marginal cost). Let s2 denote a strategy where firm 2 plays q2 = qC if it observes q 1 = qC, and plays q2 = qPC otherwise. Let s 1 denote a strategy where firm 1 plays q1 = qC. Then, (s1,s2) is a Nash equilibrium of the Stackelberg game, but it’s not a subgame perfect Nash equilibrium. (II) The first firm is allowed to change its quantity after observing firm 2’s quantity chosen at the second stage. (III) Consumers are worse off in the Stackelberg game compared with the Cournot outcome given the same parameters. Group of answer choices: a. Only II is correct b. Only I is correct. c. All options are incorrect. d. Only III is correct e. More than one option is correct.arrow_forward
- There is a duopoly in the market, with Firm A and Firm B considering whether to compete against each other or cooperate. If Firm A and Firm B both agree to cooperate, they will each earn $1,010$1,010 in profits. If one of them decides to compete at the expense of the other, it will earn $1,800$1,800 in profits, while the other will earn three times less.Calculate the difference between the total profits for both firms when they cooperate and when one takes advantage of the other. Write the exact answer. Do not round.arrow_forwardSpace 1 options: less than or equal to, equal to, greater than or equal to Space 2 options: 0 0.5 1 8 16arrow_forward1 Consider a duopoly with firm 1 and firm 2. Their cost functions are 2q₁ and cq2, respectively, where 2 < c < 10. The market demand function is p=10-Q, where Q=q₁+9₂. (a) Assume that the two firms play the Bertrand price game. Find the firms' price choices in the Bertrand equilibrium. (b) Assume that the two firms play the Cournot quantity game. Find the firms' quantity choices in the Cournot equilibrium.arrow_forward
- Consider whether the promises and threats made toward each other by duopolists and oligopolists are always credible (believable). Look at the figure below. Imagine that the two firms will play this game twice in sequence and that each firm claims the following policy. Each says that if both it and the other firm choose the high price in the first game, then it will also choose the high price in the second game (as a reward to the other firm for cooperating in the first game). RareAir's price strategy High Low $12 $15 A В High $12 $6 $6 $8 Low $15 $8 a. As a first step toward thinking about whether this policy is credible, consider the situation facing both firms in the second game. If each firm bases its decision on what to do in the second game entirely on the payouts facing the firms in the second game, which strategy will each firm choose in the second game? (Click to select) b. Now move one step back. Imagine that it is the start of the first game and each firm must decide what to…arrow_forwardThe following market is a duopoly populated only by the companies Alpha and Beta. They produce and sell identical products. The graph below shows the market demand for the product. Both firms face zero marginal cost at every level of output. If one of the firms charges a lower price than the other, the firm charging the lower price will enjoy the entire quantity demanded by all the customers in the market. If the two firms charge the same price, each will have an equal share the quantity demanded at that price. 4.5 4 3.5 2.5 82 15 1 0.5 0 $3.50 0 0 4.54 O €.50 Of. $1 1 2 Output Assume both firms have the goal of maximising their own economic profit. If the two firms do not communicate with each other, and they simultaneously choose their own prices, what will be the Nash equilibrium price for both of them? O a. 53 O D. $2 O 3 -Demand MR 4arrow_forwardQuestion 2 Consider a Cournot duopoly, the firms face an (inverse) demand function: Pb=268-10Qb. The marginal cost for firm 1 is given by mc1= 6Q The marginal cost for firm 2 is given by mc2=4Q (Assume firm 1 has a fixed cost of $102 and firm 2 had a fixed cost of $104 What are the profits of firm 2? (hint 567.26) How much consumer surplus is created by industry transactions? (hint 1333.34) Full explain this question and text typing work only We should answer our question within 2 hours takes more time then we will reduce Rating Dont ignore this line ...arrow_forward
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