ECO 2010 INCLUSIVE ACCESS
21st Edition
ISBN: 9781260564624
Author: McConnell
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Question
Chapter 28, Problem 5DQ
To determine
Possible reasons for the difference in total annual hours of work between Alpha and Omega.
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2. a) Consider a market where one firm (firm 1) currently produces, but a second firm (firm 2) is intending to enter and sell an identical product. The market has inverse demand given by p = 40 – Q, where Q is the total output sold in the market. Firm 1 has a marginal cost of 16 and firm 2 has a marginal cost of c < 16, with no fixed cost for either firm. Firm 2 has a choice of competing on price or quantity, with firms making their choices simultaneously (i.e. the market will be either a Bertrand or Cournot duopoly). If you were advising firm 2 on entering this market, how would you advise it to compete? To what extent would the size of firm 2’s cost advantage affect your advice?
b) Now assume that firm 2 is aware that other firms are considering entering the market, so the market may over time change from a duopoly to an oligopoly with more than two firms. This would not change the nature of competition (i.e. any additional firms would set price or quantity in line with the first…
1. Consider two firms (i=1,2) interacting in the market. Assume that firms compete in
quantities and therefore they choose either to cooperate or not in each round. If a firm
deviates it earns monopoly profit for a round and a punishment phase will follow from next
round onwards (for ever) where both firms choose the Cournot quantity. Assume a
discounting factor & and that firms meet in the market in every period. The demand facing
the industry is p = 1 92. Let Q = q1 + 92 denote the aggregate industry output
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91
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level. Assume further that production is costless.
Q4 (30 points)
Subsidy in Auctions
Consider a sealed-bid second-price auction with two bidders. Valuation of bidder 1 is drawn
from the uniform distribution on [0, 100], and valuation of bidder 2 is independently drawn
from the uniform distribution on [0, 300].
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