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ac 1 1
20026 1
Q 2=
Q2=290.5 Q2 and
2b
2
2(3)
2
ac 2 1
20032 1
Q 2=
Q 1=
Q1 =280.5 Q 1
2b
2
2( 3)
2
b. Q1 = 20; Q2 = 18.
c. P = 200 3(38) = $86.
d. 1 = $1200; 2 = $972.
a.
Q 1=
3.
a.
b.
c.
d.
e.
125 units.
100 units each.
The leader produces 150 units and the follower produces 75 units.
150 units.
i. 75 units.
ii. About 112.5 units.
4.
ac F 1
16,0006,000 1
Q L=
QL =1,2500.5 QL
2b
2
2( 4)
2
b. QL = 1750; QF = 375.
c. P = 16,000 4(2125) = $7,500.
d. L = $6.125 million; F = $562,500.
a.
QF =
5.
a. Set P = MC to get 800 4Q = $260. Solving yields Q = 135 units.
b. P = MC = $260.
c. Each firm earns zero economic profits.
6.
a.
Oil production. Each firm produces output independently and the market price
is determined by the total amount produced.
b. Diamond production. DeBeers is the leader that sets diamond production, and
smaller firms follow with their own levels of production.
9-1
2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
9-2
2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
7.
Model
Cournot
Stackelberg
Bertrand
Collusion
Output
Q1 = Q2 = 33.33
QL = 50; QF = 25
Market output = 100 units
Market output = 50 units
Profits
1 = 2 = $3,333.33
L = $3,750; F = $1,875
Zero
Industry Profits = $7,500
8.
a. Firm 1s output and profit would increase. Firm 2s output and profits would
decrease.
b. For small changes in costs, there would be no change in output or profits.
9.
a.
b.
c.
d.
Cournot duopoly.
Bertrand duopoly.
Stackelberg duopoly.
Sweezy duopoly.
10.
The equilibrium price will equal marginal cost, so P = 4. The profits will be P*Q
C(Q) = 4*Q 4*Q = 0.
11.
This would positively impact sales and the firms bottom line if Ford is the only
company to offer such a program. However, one would expect rivals (such as GM) to
respond with a similar plan. This would reduce the impact of Fords program on your sales
and bottom line. Indeed, GM did quickly respond with its Drive America program.
12.
9-3
2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
13.
14.
15.
16.
17.
You should support the legislation. Absent the legislation, this homogeneous product
Bertrand oligopoly will result in marginal cost pricing and zero profits. Under the legislation,
you will earn a profit of $75 $60 = $15 on each unit sold. Your 20 percent of the contract
amounts to 125 units, so your total profits under the congresswomans plan is $1,875
compared to the $0 you will earn under cutthroat Bertrand competition.
18.
19.
9-4
2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
20.
21.
When Ajinomoto was the sole supplier of lysine, it charged the monopoly price of
$1.65 per pound and sold 76 million pounds; found by solving MR = MC. The dramatic price
decline (to marginal cost) in the worldwide market for lysine after ADM entered the market
can be explained by Bertrand competition: the two firms compete by setting price in the
worldwide market driving price to marginal cost. At this price, 152 million pounds were sold
in the worldwide market and each firm sold 76 million pounds (by assumption). The 1993
price increase can be explained by collusion: ADM and Ajinomoto set the monopoly price
and produce an equal share of the monopoly output. Therefore, price rose to $1.65 per pound
and 76 million pounds are sold on the worldwide market; with each firm supplying 38
million pounds of lysine.
The inverse demand function for this Sweezy oligopoly is
P= 9000.5 Qif Q 240 . The marginal revenue function is
1,5003Q if Q 240
900Qi f Q<240
MR= [ 60,660 ] if Q=240 . Therefore, changes in marginal cost in the range of $60 and
1,5006 Q if Q>240
$660 will not result in a change in the profit-maximizing level of output.
22.
The 10 percent increase in rent is an increase in both firms fixed costs. No matter
whether the Cournot, Stackelberg, Bertrand, or Sweezy model applies to these two firms
mode of competition, a change in the firms fixed costs should not alter their strategic
decisions regarding quantity or price. Therefore, Jones should not increase prices by 10
percent.
23.
Since an excise tax is a per-unit tax it effectively increases each firms marginal cost.
In a Cournot oligopoly, increases in marginal costs shift each firms reaction function closer
to the origin. This results in each firm supplying a lower equilibrium output and charging a
higher market price (including taxes). In a Bertrand oligopoly, where firms price at marginal
cost in equilibrium, firms pass the entire amount of the excise tax to consumers. In
equilibrium, prices rise by the amount of the excise tax and output declines. Finally, in a
Sweezy oligopoly, small changes in marginal cost (through the excise tax in this case) have
no effect on firms prices. In equilibrium, price and output do not change in response to small
increases in the excise tax. For this reason, the Sweezy oligopoly is likely to generate the
greatest increase in tax revenue.
9-5
2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.