Ch 13 Study guide

Assume Waterland and Aquataste make a nonbinding, informal agreement that each will produce 250 gallons of water, charge $1.50 per gallon, and evenly split the profit of $750. If Aquataste sticks to the agreement, Waterland has an incentive to renege on the agreement by producing 350 gallons because Waterland's profits would then increase from $375 to ______ If Aquataste reneges on the agreement and produces 350 gallons, Waterland has an incentive to renege on the agreement by producing 350 gallons because Waterland's profits would increase to _____, which is better than the $312.50 Waterland would earn by sticking with the agreement.

$437.50 If one cheats they will get sell 350 gallons at the new market price of $1.25 (now a total qty of 250+350=600). $1.25*350=$437.50 $350 If Waterland also reneges and produces 350, market qty supplied is now 700 and price is $1. Each firm earns profit of $350 ($1*350). This is better for waterland than before since they were selling the 250 gallons at $1.25 (Profit = 250*1.25=312.50)

Suppose that Airstream and Crossroads are the sole producers of a fuel-efficent recreational vehicle. The two firms currently charge the same price for their products. If neither firm reduces the price of its fuel-efficent recreational vehicle, each firm earns $40 million in profit. If both firms reduce their prices, then each firm will earn $10 million in profit. If one firm reduces its price and the other does not, then the firm that reduces price will earn a profit of $70 million while the other firm will earn a profit of $2 million. Assuming that collusion is not a possibility, the Nash equilibrium occurs when ______

both firms will reduce their price.

Assume there are currently five firms producing and selling fertilizer in the European market. Also assume that the product is differentiated and barriers to entry are high in the industry, making this market an oligopoly. If two firms were to enter the market, economists expect the equilibrium price will likely _____ and the equilibrium quantity will likely ____

decrease, increase

Some towns limit the number of hours that liquor stores can sell alcohol on Sundays. This restriction could actually help liquor stores by

decreasing sales and increasing price

Suppose there are two breakfast restaurants in your college town, Waffle Kingdom and Flip's Flapjacks, and they decide to operate collusively as a cartel. If both restaurants abide by the cartel's agreement, then each will earn $100,000 in profit. If both restaurants cheat on the cartel's agreement, then both will earn $25,000 in profit. If one restaurant cheats and the other abides by the agreement, then the cheater will earn a profit of $150,000 while the firm that abides by the agreement will have a loss of $12,500.The most profitable outcome for the two restaurants would be _________________.

for both restaurants to abide by the cartel's agreement

Network externalities are important because

increasing membership increases the benefits to other members, which increases quantity demanded

(a) Suppose one rental car company raises its prices and the rival car companies leave their prices unchanged. But when another rental car company lowers its prices, the other companies match the price decrease. This situation is an example of _____ (b) If one rental car company raises its prices and the rival car companies match the increase, this situation is an example of _____

kinked demand curve, price leadership

The following graph depicts the demand curve, marginal revenue curve, and marginal cost curve that an oligopolist faces. The firm is currently charging the cartel price, P*, and producing the cartel quantity, Q*. Suppose input prices fall and marginal cost decreases from MC1 to MC2. Based on this event alone, the firm depicted in the figure above will _____

not change the price.

The kinked demand-curve theory states that oligopolists have a greater tendency to _____ rivals' price cuts but will_____ rivals' price increases.

respond aggressively to, largely ignore

Larry and Susan work in an office near Pizzas R Us and Pizzapalooza, pizzerias on the same block. Larry notices that both places are charging only $1.25 for one slice of pizza, which is below the price of $1.75 that one slice of pizza typically costs elsewhere in the city.Susan wonders if Pizzas R Us and Pizzapalooza are engaged in a price war. Over the past month, she has noticed that each store has lowered its prices each week, but that Pizzapalooza always lowered its price first. She suggests that Pizzapalooza is engaging in predatory pricing.Larry correctly replies that they cannot determine whether Pizzapalooza is guilty of predatory pricing because _______

to prove Pizzapalooza engaged in predatory pricing, you would need to prove that Pizzapalooza priced pizza below average variable cost with the specific intention of driving Pizzas R Us out of business.