244051223-Chap-009.doc

Chapter 09 - Basic Oligopoly Models

Chapter 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 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 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


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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


5. Which of the following are quantity qu antity setting oligopoly models? a. Stackelberg b. Cournot c. Bertrand D. Stackelberg and Cournot


6. Which of the following are price setting oligopoly models? a. Stackelberg b. Cournot C. Bertrand d. Cournot and Stackelberg


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 Hard

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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


5. Which of the following are quantity qu antity setting oligopoly models? a. Stackelberg b. Cournot c. Bertrand D. Stackelberg and Cournot


6. Which of the following are price setting oligopoly models? a. Stackelberg b. Cournot C. Bertrand d. Cournot and Stackelberg


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


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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


9. Which of the following is a profit-maximizing 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


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 co-exist after the entry? a. $25 B. $20 c. $15 d. None of the statements associated with this question are correct


11. "An oligopoly is an oligopoly. o ligopoly. 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


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12. "Tom and Jack are the only two local gas stations. Although they have different constant marginal costs, they both survive continued competition." Tom and Jack do not constitute a: a. Sweezy oligopoly b. Cournot oligopoly c. Stackelberg oligopoly D. Bertrand oligopoly

Difficulty: Medium

13. A market is not contestable if: a. All producers have access to the same technology b. Consumers respond quickly to a price change c. Existing firms cannot respond quickly to entry by lowering their price D. There are sunk costs

Difficulty: Easy

14. Firm A has a higher marginal cost than firm B's. They compete in a homogeneous product Cournot duopoly. Which of the following results will not o ccur? a. QA < QB b. ProfitA < ProfitB c. Revenue of firm A < Revenue of firm B D. PriceA < PriceB

Difficulty: Easy

15. If firms compete in a Cournot fashion, then each firm views the A. Output of the rival as given b. Prices of rivals as given c. Profits of rivals as given d. All of the statements associated with this question are correct

Difficulty: Medium

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16. Two firms compete in a Stackelberg fashion and firm two is the leader, then A. Firm one views the output of firm two as given b. Firm two views the output of firm one as given c. All of the statements associated with this question are correct d. None of the statements associated with this question are correct

Difficulty: Hard

17. With linear demand and constant marginal cost, a Stackelberg leader's profits are ___________ the follower. a. Less than b. Equal to C. Greater than d. Either less than or greater to

Difficulty: Medium

18. An oligopolist faces a demand curve that is steeper at higher prices than at lower prices. Which of the following is most likely? a. The firm competes with others in the Cournot fashion B. Other firms match price increases but do not match price reductions c. Other firms match price reductions but do not match price changes d. The firm competes with others in the Bertrand fashion

Difficulty: Medium

19. When firm 1 enjoys a first-mover advantage in a Stackelberg duopoly, it will: a. Produce more output and charge a lower price than firm 2 B. Produce more output and charge the same price as firm 2 c. Produce less output and charge the same price as firm 2 d. Produce less output and charge a higher price than firm 2

Difficulty: Medium

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20. 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. Sweezy fashion b. Cournot fashion c. Bertrand fashion D. Cournot fashion and Bertrand fashion

Difficulty: Hard

21. The market demand in a Bertrand duopoly is P = 10 - 3Q, and the marginal costs are $1. Fixed costs are zero for both firms. Which of the following statement(s) is/are true? a. P = $1 b. Profits of Firm One = profits of Firm Two c. Producer's surplus of Firm One = producer's surplus of Firm Two D. All of the statements associated with this question are correct

Difficulty: Easy

22. If firms are in Cournot equilibrium: a. Each firm could increase profits by unilaterally increasing output b. Each firm could increase profits by unilaterally decreasing output c. Firms could increase profits by jointly increasing output D. Firms could increase profits by jointly reducing output

Difficulty: Easy

23. A firm's isoprofit curve is defined as the combinations of outputs produced by: a. A firm that earns it the same level of profits B. All firms that yield the firm the same level of profit c. All firms that makes total industry profits constant d. None of the statements associated with this question are correct

Difficulty: Easy

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24. Two identical firms compete as a Cournot duopoly. The demand they face is P = 100 2Q. The cost function for each firm is C(Q) = 4Q. The equilibrium output of each firm is: a. 8 B. 16 c. 32 d. 36

Difficulty: Medium

25. Two identical firms compete as a Cournot duopoly. The demand they face is P = 100 2Q. The cost function for each firm is C(Q) = 4Q. Each firm earns equilibrium profits of: a. $1,024 b. $2,048 c. $4,096 D. $512

Difficulty: Medium

26. Two identical firms compete as a Cournot duopoly. The demand they face is P = 100 2Q. The cost function for each firm is C(Q) = 4Q. In equilibrium, the deadweight loss is: a. $128 B. $256 c. $384 d. $512

Difficulty: Hard

27. Which of the following statements is not a condition for a Stackelberg oligopoly? A. The market is contestable b. Barriers to entry exist c. A single firm (the leader) selects an output before all other firms choose their outputs d. The firms produce either differentiated or homogeneous products

Difficulty: Easy

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28. With a linear inverse demand function and the same constant marginal costs for both firms in a homogeneous product Stackelberg duopoly, which of the following will result? a. Profits of leader > Profits of follower b. QL = 2QF c. PL > PF D. Profits of leader > Profits of follower and Q L = 2QF

Difficulty: Medium

29. Suppose that the duopolists competing in Cournot fashion agree to produce the collusive output. Given that firm two commits to this collusive output, it pays firm one to A. Cheat by producing a higher level of output b. Cheat by producing a lower level of output c. Cheat by raising prices d. None of the statements associated with this question are correct

Difficulty: Medium

30. Two firms compete as a Stackelberg duopoly. The demand they face is P = 100 - 3Q. The cost function for each firm is C(Q) = 4Q. The outputs of the two firms are: A. QL = 16; QF = 8 b. QL = 24; QF = 12 c. QL = 12; QF = 8 d. QL = 20; QF = 15

Difficulty: Medium

31. Two firms compete as a Stackelberg duopoly. The demand they face is P = 100 - 3Q. The cost function for each firm is C(Q) = 4Q. The profits of the two firms are: A. πL = $384; πF = $192 b. πL = $192; πF = $91 c. πL = $56; πF = -$28 d. πL = $56; πF = $28

Difficulty: Hard

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32. From a consumer's point of view, which type of oligopoly is most desirable? a. Sweezy b. Cournot c. Stackelberg D. Bertrand

Difficulty: Easy

33. Collusion in oligopoly is difficult to achieve because: a. It is prohibited by law b. 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. It is prohibited by law and every firm has an incentive to cheat given that others follow the agreement

Difficulty: Medium

34. Since the end of the war in the Persian Gulf, the world price of oil has fallen. But in some areas, consumers have seen little relief at the pump. This phenomenon can be explained by the theory of: a. Perfect competition b. Monopolistic competition C. Oligopoly d. Monopoly

Difficulty: Medium

35. The spirit of equating marginal cost with marginal revenu e is not held by a. Perfectly competitive firms b. Oligopolistic firms c. Perfectly competitive firms and oligopolistic firms D. None of the statements associated with this question are correct

Difficulty: Easy

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36. MCI announced a price discount plan for small firms. Their stock immediately fell in price. This shows that: A. MCI is probably competing in a Bertrand oligopolistic industry b. Stockholders are sometimes not rational c. There is increased demand for MCI's stock d. AT&T sold out its stock of MCI just after the announcement

Difficulty: Easy

37. An oligopolist has a marginal revenue curve that jumps down at 500 units of output. What kind of oligopoly does the firm most likely belong to? A. Sweezy b. Cournot c. Stackelberg d. Bertrand

Difficulty: Easy

38. There are many different models of oligopoly because: a. Beliefs play an important role in oligopolistic competition b. Firms do not maximize profits in oligopolistic competition c. Oligopoly is the most complicated type of market structure D. Beliefs play an important role in oligopolistic competition and oligopoly is the most complicated type of market structure

Difficulty: Easy

39. Which of the following is not a type of market structure? a. Monopolistic competition b. Perfect competition C. Monopolistic oligopoly d. Monopoly

Difficulty: Easy

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40. Ed just finished an empirical study of oligopoly. He found the following result: "In the examined industry, a firm's demand curve is such that other firm's match price increases but do not match price reductions." What kind of oligopoly is the examined industry? a. Sweezy model b. Cournot model c. Stackelberg model D. None of the statements associated with this question are correct

Difficulty: Medium

41. Which of the following is true: a. If there are only two firms in a market, prices must be above marginal cost b. If there is only one firm in a market, prices must be above marginal cost c. All of the statements associated with this question are correct D. None of the statements associated with this question are correct

Difficulty: Hard

42. Which firm would you expect to make the lowest profits, other things equal: A. Bertrand oligopolist b. Cournot oligopolist c. Sweezy oligopolist d. Stackelberg leader

Difficulty: Medium

43. Which would you expect to make the highest profits, other things equal? a. Bertrand oligopolist b. Cournot oligopolist C. Stackelberg leader d. Stackelberg follower

Difficulty: Medium

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44. When firm one acts as a Stackelberg leader: a. Firm two produces the monopoly output b. Firm one's profit is less than its profit if they compete in a Cournot fashion c. Firm two will earn more than if they compete in a Cournot fashion D. None of the statements associated with this question are correct

Difficulty: Hard

45. Firm one and firm two compete as a Cournot oligopoly. There is an increase in marginal cost for firm one. Which of the following is not true? a. Firm one will produce less b. Firm two will produce more C. Both firm one's and firm two's reaction functions are shifted d. Profits of firm one will decrease

Difficulty: Medium

46. Two firms produce different goods. Firm one has a positive-sloped reaction function. This can be explained best by a. Homogeneous product Cournot oligopoly b. Homogeneous product Bertrand oligopoly C. Heterogeneous product Bertrand oligopoly d. None of the statements associated with this question are correct

Difficulty: Hard

47. A duopoly in which both firms have a Lerner index of monopoly power equal to 0 is probably a: a. Sweezy oligopoly b. Cournot oligopoly c. Stackelberg oligopoly D. Bertrand oligopoly

Difficulty: Medium

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48. The inverse demand in a Cournot duopoly is P = a - b (Q1 + Q2), 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. The equilibrium output of each firm is the same as a situation where each firm's: a. Demand increases by t b. Demand decreases by t C. Marginal cost increases by t d. Marginal cost decreases by t

Difficulty: Hard

49. The inverse demand in a Cournot duopoly is P = a - b (Q1 + Q2), 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. The tax revenue is: a. T times the total output of the two firms should there be no sales tax B. Less than t times the total output of the two firms should there be no sales tax c. Greater than t times the total output of the two firms should there be no sales tax d. 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. Sweezy oligopoly b. Cournot oligopoly c. Stackelberg oligopoly D. Bertrand oligopoly

Difficulty: Easy

51. The Bertrand theory of oligopoly assumes A. Firms set prices b. Rivals will increase their output whenever a firm increases its output c. Rivals will decrease output whenever a firm decreases its output d. Rivals will follow the learning curve

Difficulty: Easy

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52. Which of the following is true? a. In Bertrand oligopoly each firm reacts optimally to price changes b. In Cournot oligopoly firms engage in quantity competition c. In Sweezy oligopoly a change in marginal cost may not have an effect on output or price D. All of the statements associated with this question are correct

Difficulty: Medium

53. In a Cournot oligopoly, a decrease in a firm's marginal cost leads to a. Reduced output and a higher price b. Reduced output and a lower price c. Higher output and a higher price D. Higher output and a lower price

Difficulty: Easy

54. The Sweezy 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 may not affect prices d. All of the statements associated with this question are correct

Difficulty: Easy

55. Which of the following is not a quantity-setting oligopoly model? a. Stackelberg b. Cournot C. Bertrand d. All of the above are quantity setting models

Difficulty: Easy

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56. In the presence of large sunk costs, which of the following market structures generally leads to the highest price? a. Stackelberg b. Cournot c. Bertrand D. Monopoly

Difficulty: Easy

57. Both firms in a Cournot duopoly would experience lower profits if A. There was an increase in marginal production costs 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. There was an increase in marginal production costs and ne firm reduced output below the Cournot Nash equilibrium level, while the other firm continued to produce its Cournot Nash equilibrium output

Difficulty: Hard

58. Which of the following is a feature of a contestable market? a. There are several firms in the market serving many consumers b. There is a single firm in the market serving many consumers c. The market price is equal to marginal cost D. There is a single firm in the market serving many consumers and the market price is equal to marginal cost

Difficulty: Medium

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59. Which of the following is true of a perfectly contestable market? A. P = MC b. P > MC c. P < ATC d. P > MC and P < ATC

Difficulty: Medium

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60. A new firm enters a market which is initially serviced by a Cournot duopoly charging a price of $20. What will the new market price be should the three firms co-exist after the entry? a. $20 B. Below $20 c. Above $20 d. None of the statements associated with this question are correct

Difficulty: Hard

61. "An oligopoly is an oligopoly. Firms behave the same no matter what type of oligopoly it is." This statement is true of: a. Bertrand and Cournot oligopolies b. Cournot and Stackelberg oligopolies c. Bertrand and Stackelberg oligopolies D. None of the statements associated with this question are correct

Difficulty: Medium

62. Sue and Jane own two local gas stations. They have identical constant marginal costs, but earn zero economic profits. Sue and Jane constitute a. A Sweezy oligopoly b. A Cournot oligopoly C. A Bertrand oligopoly d. None of the statements associated with this question are correct

Difficulty: Medium

63. The profits of the leader in a Stackelberg duopoly A. Are greater than those of the follower b. Equal those of the follower c. Are less than those of the follower d. Are greater than those of a Sweezy oligopolist

Difficulty: Hard

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64. An important condition for a contestable market is: a. All producers have different technologies b. There are high transaction costs C. Existing firms cannot respond quickly to entry by lowering their price d. There are sunk costs

Difficulty: Easy

65. The Cournot theory of oligopoly is based on the assumption that each firm believes that rivals will A. Keep their output constant if it changes its output b. Increase their output whenever it increases its output c. Decrease their output whenever it increases its output d. Randomly change output whenever it changes its output

Difficulty: Easy

66. 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. In Cournot oligopoly market firms produce an identical product at a constant marginal cost and engage in price competition C. In Sweezy oligopoly markets each firm believes rivals will cut their prices in response to a price reduction, but will not raise prices in response to price increases d. In oligopoly market a change in marginal cost never has an affect on output or price

Difficulty: Medium

67. Which of the following are not price setting oligopoly models? a. Stackelberg b. Cournot c. Bertrand D. Stackelberg and Cournot

Difficulty: Easy

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68. A new firm enters a market which is initially serviced by a Bertrand duopoly charging a price of $30. Assuming that the new firm is equally as efficient as the incumbent firms, what will the new price be should the three firms co-exist after the entry? a. Above $30 b. Below $30 C. Equal to $30 d. Unable to tell given the information provided

Difficulty: Easy

69. One of the characteristics of a contestable market is that a. All firms have different productive technology B. Consumers react quickly to a price change c. Existing firms respond quickly to entry by lowering their price d. There are sunk costs

Difficulty: Easy

70. Firm A has a higher marginal cost than firm B. They compete in a homogeneous product Cournot duopoly. Which of the following results will not o ccur? A. QA > QB b. ProfitA < ProfitB c. Revenue of firm A < Revenue of firm B d. PriceA = PriceB

Difficulty: Easy

71. The market demand in a Bertrand duopoly is P = 15 - 4Q, and the marginal costs are $3. Fixed costs are zero for both firms. Which of the following statement(s) is/are true? A. P = $3 b. P = $10 c. P = $15 d. None of the statements associated with this question are correct

Difficulty: Easy

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72. Two identical firms compete as a Cournot duopoly. The inverse market demand they face is P = 80 - 4Q. The cost function for each firm is C(Q) = 8Q. The price charged in this market will be a. $12 B. $32 c. $48 d. $56

Difficulty: Medium

73. Two firms compete as a Stackelberg duopoly. The inverse market demand they face is P = 62 - 4.5Q. The cost function for each firm is C(Q) = 8Q. The outputs of the two firms are: a. QL = 48; QF = 24 b. QL = 35; QF = 6 C. QL = 6; QF = 3 d. None of the statements associated with this question are correct

Difficulty: Medium

74. Which of the following is not a feature of Sweezy oligopoly? a. There are a few firms in the market serving many consumers b. The firms produce differentiated 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. Free entry and exit occurs in the market

Difficulty: Easy

75. The profits of the follower in a Stackelberg duopoly a. Are greater than those of the leader b. Equal those of the leader C. Are less than those of the leader d. All the statements associated with this question are correct

Difficulty: Easy

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76. If firms are in Cournot equilibrium, they could increase profits by a. Jointly increasing output B. Jointly reducing output c. Unilaterally increasing prices d. Unilaterally reducing prices

Difficulty: Easy

77. Suppose that the duopolists competing in Cournot fashion agree to produce the collusive output. Given that firm one commits to this collusive output, it pays firm two to A. Cheat by producing more output b. Cheat by producing less output c. Cheat by raising prices d. None of the statements associated with this question are correct

Difficulty: Hard

78. There are many different models of oligopoly because: a. Beliefs are not incorporated in oligopolistic competition b. Firms do not maximize profits in oligopolistic competition C. Oligopoly is the most complicated type of market structure d. Both a and c

Difficulty: Easy

79. Consider a Cournot duopoly with the following inverse demand function: P = 100 -2Q1 2Q2. The firms' marginal cost are identical and given by MC i(Qi) = 2Qi. Based on this information firm 1 and 2's marginal revenue functions are a. MR1(Q1,Q2) = 100 - 2Q1 - Q2 and MR2(Q1,Q2) = 100 - Q1 - 2Q2 B. MR1(Q1,Q2) = 100 - 4Q1 - 2Q2 and MR2(Q1,Q2) = 100 - 2Q1 - 4Q2 c. MR1(Q1,Q2) = 100 - 2Q1 - 4Q2 and MR2(Q1,Q2) = 100 - 4Q1 - 2Q2 d. MR1(Q1,Q2) = 24.5 - 0.5Q2 and MR2(Q1,Q2) = 24.5 - 0.5Q1

Difficulty: Medium

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80. Consider a Cournot duopoly with the following inverse demand function: P = 100 - 2Q1 2Q2. The firms' marginal cost are identical and given by MC i(Qi) = 2Qi. Based on this information firm 1 and 2's reaction functions are a. r1(Q2) = 24.5 - 0.5Q1 and r2(Q1) = 24.5 - 0.5Q2 B. r1(Q2) = 24.5 - 0.5Q2 and r1(Q2) = 24.5 - 0.5Q1 c. Q1 = 49 - 0.5Q2 and Q2 = 49 - 0.5Q1 d. Q1 = 49 - 0.25Q2 and Q2 = 49 - 0.25Q1

Difficulty: Medium

81. Consider a Cournot duopoly with the following inverse demand function: P = 100 - 2Q1 2Q2. The firms' marginal cost are identical and given by MC i(Qi) = 2Qi. Based on this information consumer surplus in this market is a. $16.33 b. $32.67 c. $1,067.11 D. $2,134.22

Difficulty: Hard

82. Consider a Stackelberg duopoly with the following inverse demand function: P = 100 2Q1 - 2Q2. The firms' marginal cost are identical and given by MCi(Qi) = 2Qi. Based on this information the Stackelberg leader's marginal revenue function is a. MR(QL) = 50 - 2QL + c1 B. MR(QL) = 50 - 2QL + c2 c. MR(QF) = 100 - 2QF + c1 d. MR(QF) = 100 - QF + c2

Difficulty: Hard

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83. Consider a Stackelberg duopoly with the following inverse demand function: P = 100 2Q1 - 2Q2. The firms' marginal cost are identical and given by MCi(Qi) = 2Qi. Based on this information the Stackelberg follower's marginal revenue function is A. MRF(QL,QF) = 100 - 2Q L - 4QF b. MRF(QL,QF) = 100 - 4QL - 2QF c. MRF(QL,QF) = 100 - 2QL - QF d. MRF(QL,QF) = 100 - QL - 2QF

Difficulty: Medium

84. Consider a Stackelberg duopoly with the following inverse demand function: P = 100 2Q1 - 2Q2. The firms' marginal cost are identical and given by MCi(Qi) = 2Qi. Based on this information the Stackelberg follower's reaction function is a. QF = 24.5 - 0.25QL b. QF = 49 - 0.25QF C. QF = 24.5 - 0.5QL d. QF = 24.5 - QL

Difficulty: Medium

85. Consider a Stackelberg duopoly with the following inverse demand function: P = 100 2Q1 - 2Q2. The firms' marginal cost are identical and given by MCi(Qi) = 2Qi. Based on this information the Stackelberg leader's reaction function is a. QL = 24.5 - 0.5QF b. QL = 50 - 0.5QF c. QL = 49 - 0.5QF D. None of the statements associated with this question are correct

Difficulty: Easy

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86. Consider a Stackelberg duopoly with the following inverse demand function: P = 100 2Q1 - 2Q2. The firms' marginal cost are identical and given by MCi(Qi) = 2Qi. Based on this information the consumer surplus in this market is a. $36.75 b. $73.50 C. $1,352.40 d. $2,704.80

Difficulty: Hard

87. Consider two firms competing to sell a homogeneous product by setting price. The inverse demand curve is given by P = 6 - Q. If each firms' cost function is Ci(Qi) = 6 + 2Qi, then each firm will symmetrically produce units of output and earn. a. 4 units; profits of $6 b. 2 units; profits of $2 c. 4 units; losses of $2 D. 2 units; losses of $6

Difficulty: Medium

88. Consider two firms competing to sell a homogeneous product by setting price. The inverse demand curve is given by P = 6 - Q. If each firms' cost function is Ci(Qi) = 2Qi, then consumer surplus in this market is a. $2 b. $4 C. $8 d. There is insufficient information to determine consumer surplus in this market

Difficulty: Medium

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89. Consider two firms competing to sell a homogeneous product by setting price. The inverse demand curve is given by P = 15 - Q. Firm 1 has MC1(Q1) = 1 and firm 2 has MC2(Q2) = 1.05. Based on this information we can conclude that the market price will be a. $1 and each firm will produce 7 units b. $1.05 and each firm will produce 6.975 units C. $1.04 and firm 1 will produce 13.96 units and firm 2 will produce 0 units d. $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. 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. 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. 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. A decrease in firm 1's marginal cost will cause a. 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. 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. 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

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92. Consider a market consisting of two firms where the inverse demand curve is given by P = 500 - 2Q1 - 2Q2. Each firm has a marginal cost of $50. Based on this information we can conclude that consumer surplus in the different equilibrium oligopoly models will follow which of the following orderings. a. CSCollusion > CSStackelberg > CSCournot > CSBertrand B. CSBertrand > CSStackelberg > CSCournot > CSCollusion c. CSBertrand > CSCournot > CSStackelberg > CSCollusion d. CSStackelberg > CSBertrand > CSCournot > CSCollusion

Difficulty: Medium

93. Consider a market consisting of two firms where the inverse demand curve is given by P = 500 - 2Q1 - 2Q2. 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. a. QCollusion < QStackelberg < QCournot < QBertrand B. QCollusion < QCournot < QStackelberg < QBertrand c. QBertrand < QCollusion < QCournot < QStackelberg d. 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. Each firm has a marginal cost of $50. Based on this information we can conclude that equilibrium price in the different oligopoly mode ls will follow which of the following orderings. A. PBertrand < PStackelberg < PCournot < PCollusion b. PStackelberg < PCollusion < PCournot < PBertrand c. PCollusion < PCournot < PStackelberg < PBertrand d. PBertrand < PCournot < PStackelberg < PCollusion

Difficulty: Easy

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95. Consider a market consisting of two firms where the inverse demand curve is given by P = 500 - 2Q1 - 2Q2. Each firm has a marginal cost of $50. Based on this information we can conclude that aggregate profits in the different equilibrium oligopoly models will follow which of the following orderings. a. πBertand > πCollusion > πStackelberg > πCournot B. πCollusion > πCournot > πStackelberg > πBertand c. πCollusion > πStackelberg > πCournot > πBertand d. None of the statements associated with question are correct

Difficulty: Medium

Essay Questions

96. In Gelate, Pennsylvania, the market for compact discs has evolved as follows. There are two firms that each use a marquee to post the price they charge for compact discs. Each firm buys CDs from the same supplier at a cost of $5.00 per disc. The inverse market demand in their area is given by , where Q is the total output produced by the two firms. a. Solve for the Bertrand equilibrium price and market output. b. Would your answer differ if the products were not perfect substitutes? Explain. a. P = MC = $5. To find industry output, we find Q such that P = 5 = 10 - 2Q. Solving for Q gives us industry output of 2.5 units. b. When goods are perfect substitutes, firms are forced to charge a price equal to marginal cost, otherwise they sell nothing. However, if consumers view the goods as heterogeneous (differentiated products) a firm does not loose the entire market if it prices abo ve another firm's price.

97. Suppose you are the manager of a medium-sized firm that operates in an industry that has a four-firm concentration ratio of 100 percent. All firms in the industry are of equal size. In order to determine your firm's optimal output and price, you must obtain information about how rivals would respond to changes in your decisions. If you were the manager, 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.

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98. You are the manager of a firm operating in a differentiated-product oligopoly. Show graphically your optimal response to an increase in marginal cost if a. You believe rivals will follow price reductions but no t price increases. b. You believe rivals will hold output constant if you decrease output. c. You believe rivals will follow price increases but not price decreases.

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a. In this case, the demand function for a Sweezy oligopolist is given by ABC in Figure 9-3a, and marginal revenue curve is ADEF. So long as marginal cost changes by a small amount, your output will remain at Q. For large increases in MC, the profit-maximizing level of output will fall. Figure 9-3a

b. In this case, the initial Cournot equilibrium is given by point A in Figure 9-3b. An increase in firm one's marginal cost results in a new Cournot eq uilibrium at point B. Thus, the manager of firm one should reduce output to maximize profits. Figure 9-3b

c. In this case, the demand curve is ABC in Figure 9-3c, while MR is ADEF. An increase in marginal cost from MC to MC* leads to a reduction in the profit-maximizing level of output. Figure 9-3c

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99. The (inverse) demand in a Cournot duopoly is and

and cost are

. Show that the Cournot equilibrium levels of output are and

.

Equating MR = MC for firm one yields a - b (Q 1 + Q2) - bQ1 = c1. This yields a reaction function for firm one of

Similarly, equating MR = MC for firm two yields a - b (Q1 + Q2) - bQ2 = c2, so two's reaction function is

Solving these two equations simultaneously gives us the d esired result.

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100. The market for widgets consists of two firms that produce identical products. Competition in the market is such that each of the firms independently produces a quantity of output, and these quantities are then sold in the market at a price that is determined by the total amount produced by the two firms. Firm 2 is known to have a cost advantage over Firm 1. A recent study found that the (inverse) market demand curve faced by the two firms is and costs are and a. Determine the marginal revenue for each firm. b. Determine the reaction function for each firm. c. How much output will each firm produce in equilibrium? d. What are the equilibrium profits for each firm?

.

a. MR1 = 280 - 2Q2 - 4Q1 and MR2 = 280 - 2Q1 - 4Q2. b. Firm one will produce such that MR1 = MC1, or 280 - 2Q2 - 4Q1 = 3. Thus, the reaction function of firm one is r 1(Q2) = 69.25 -.5Q2. Firm two will produce such that MR2 = MC2, or 280 - 2Q1 + 4Q2 = 2. The reaction function for firm two is thus r2(Q1) = 69.5 -.5Q1. c. Solving Q1 and Q2 from the two reaction functions, we have

d. Π1 = 95(46) - 3(46) = $4,232; Π2 = 95(46.5) - 2(46.5) = $4,324.5.

101. When MCI announced a price discount plan designed to induce small firms to use its services, the price of its stock immediately declined. Why d o 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 long-distance services is oligopolistic; competitors like AT&T would likely react to MCI's plan by changing their own pricing structure. In fact, this is precisely what did happen; 6 days after the MCI announcement, AT&T followed with a similar plan. Effectively, MCI's action initiated a "price war" that parallels our analysis of Bertrand competition.

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102. The inverse demand curve for a Stackelberg duopoly is

. The leader's

cost structure is . The follower's cost structure is . a. Determine the reaction function for the follower. b. Determine the equilibrium output levels for both the leader and the follower. c. What are the profits for the leader? For the follower? a. The follower's reaction function is QF = 831.25 -.5QL. b. The leader's output is

Similarly, QF = 831.25 -.5(832.9) = 414.8 units. Thus, the price of output is given by P = 10,000 - 6(832.9 + 414.8) = $2,513.8. c. ΠL = 2513.8(832.9) - 15(832.9) = $2,081,250.5; ΠF = $1,032,354.2.

103. What real-world 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 quantity-setting decisions. Evidence of Stackelberg behavior includes one firm setting output prior to other firms in the market, who take the leader's output as given. Evidence of Bertrand oligopoly would be severe price competition, with low prices and profits.

104. Zelda Industries is the only firm of its kind in the world. Due largely to historical accident, it began producing streganomas in 1985 in a vacant warehouse. Virtually anyone with a degree in college chemistry could easily replicate the firm's formula, which is not patent protected. Nonetheless, since 1985 Zelda has averaged accounting profits of 6 percent on investment. This rate is comparable to the average interest rate that large banks paid on deposits over the period. Do you think Zelda is earning monopoly profits? Why? No. In fact, Zelda could have invested funds over the period at 6 percent. Its accounting profits of 6 percent translate into zero economic profits. Most likely, Zelda operates in a contestable market, and is disciplined by the threat of entry by other firms. Therefore, Zelda cannot charge prices in excess of marginal cost.

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105. You are the manager of a firm in a new industry. You have gotten the jump on the only other producer in the market. You know what your competitor's cost function is, and it knows yours. Your products, although different to experts, are indistinguishable to the average consumer. Your marketing research team has provided you with the following market demand curve:

. Your cost function is

. Your competitor's cost function

is . 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. What output level will you choose, and what price will you charge? Explain. You are clearly a Stackelberg leader, and should set the Stackelberg output to maximize your profits. To use the formulas in the text, you first need to convert the given demand equation (Q = 1250 -.5P) into the corresponding inverse demand function. To do this, solve the given demand equation for P to get P = 2500 - 2Q. Based on this inverse demand function, use the formula in the text to solve for your Stackelberg output as the leader. This is given by the formula QA = (a + c B - 2cA)/2b = (2500 + 6 - 2(8))/4 = 622.5 units. The follower will produce QB = (a - c B)/2b -.5QA = [2500 - 6]/4 -.5(622.5) = 312.25 units. Thus, the price of output will be P = 2500 - 2(622.5 +312.25) = $630.50.

106. You are a potential entrant into a market that previously has had entry blocked by the government. Your market research has estimated that the inverse market demand curve for this industry is

, where

. You estimate that if you enter the

market, your own cost function will be . The government has invited your firm to enter the industry, but it will require you to pay a one-time license fee of $100,000. You do not know the cost functions of the firms presently in the market; however, the price is now $16,000. Last year 87 units were sold by existing firms. Would you choose to enter this market? Explain. In this case, your inverse demand function remains at P = 22,500 - 75(87) - 75Qy = 15,975 75Qy. Equating MR = MC yields 15,975 - 150 Qy = 15,300. Solving for Qy yields the profitmaximizing output by the entrant, assuming existing firms hold output co nstant: Qy = 4.5 units. The corresponding price is P = 22,500 - 75(87 + 4.5) = $15,637.5. Profits if you enter (net of the license fee) are $15,637.5(4.5) - 15,300(4.5) - 100,000 = $-98,481.25. Thus, it would not pay to enter the industry if you expect rivals to maintain their present output.

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107. Compare and contrast the output levels and profits for the Cournot, Stackelberg, and Bertrand models. Use the following cost and demand conditions for your comparison, and suppose there are two firms: costs of zero.

. Each firm has a marginal cost of $20 and fixed

108. Over the past 20 years, 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. Between 1990 and 1995, however, crude oil prices have dropped by about 20 percent, due in part to increased production from the former Soviet Union, Latin America, Asia, and the North Sea. In light of these increases in oil production from non-OPEC countries, 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. OPEC must decrease its total quantity of oil produced by the amount that non-OPEC countries increase their oil production. This will be difficult for OPEC to do. As demand and cost conditions change, old collusive agreements no long suit the new environment. Moreover, even in the absence of changing demand or cost conditions, each firm has an incentive to cheat on collusive agreements, as shown in the text.

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109. In the late 1990s, Chrysler announced a new incentive program on its minivans that included subsidized interest rates and cash allowances. Under the plan, consumers could enjoy financing rates as low as 4.9 percent, as well as a $500 cash allowance toward the lease or purchase of a new minivan. What changes in sales would you anticipate if you were the manager of a Dodge/Plymouth franchise? Why? Other things equal, your sales would rise. However, given the oligopolistic nature of the industry, you should anticipate that automakers like Gen eral Motors and Ford will likely counter with similar incentive programs, which will mitigate to some extent the sales increase you otherwise would have enjoyed.

110. Orion and Zeda are the only producers of a unique product that sold in a market where the inverse demand curve is . The firms produce identical products and have identical cost functions given by . The managers of each firm must decide on their outputs on Monday morning and then bring products to market by noon. a. What is each firm's marginal revenue? Marginal cost? b. Equate each firm's marginal revenue to marginal cost. c. Use your result in part ( b) to solve for each firm's reaction function. d. Use your results in part ( c) to solve for the Cournot equilibrium levels of output for each firm. a. MRO = 200 - 4qo - 2qz; MRz = 200 - 2qo - 4qz ;MCO = MCz = 4. b. MRO = MCO → 200 - 4qo - 2qz = 4; MRz = MCz → 200 - 2qo - 4qz = 4. c. and d. Substituting q z into qo from part (c) yields an equilibrium output for Orion of 32.7 units. Likewise, substituting qo into q z from part (c), equilibrium output for Zeda is 32.7 units.

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