Module 3
Assuming P > AVC, a profit-maximizing firm, in a perfectly competitive market, produces a level at which,
MR = MC P = MC P = MR
A monopolist's marginal revenue (MR) is given by:
MR = P(1+E)/E
What is the marginal revenue (MR) of the inverse linear demand function,
MR = a + 2bQ
Suppose the inverse demand function for two firms in a Cournot oligopoly is given by P = 12 - (Q + 09. Which of the following represent MRI and MR ?
MR2 = 12 - Q1 - 2Q2 MR1 = 12 - Q2 - 2Q1
Which is a strategy firms use to tailor goods and services to meet the needs of a particular segment of the market?
Niche marketing
Suppose a spinach farmer operates in perfect competition. At the market price of $3.00 per bunch, the farmer sells 125 bunches per day. If the farmer increases her price to $3.01, she will sell bunches.
0
Inverse market demand is: P = 1,000 - (Ql+ 02). Costs for each firm are identical and given by: qq = 4Qi The profit earned by each firm in a Bertrand oligopoly equal $
0 Firms earn zero economic profit in a Bertrand oligopoly.
In the Stackelberg model, the follower's profit-maximizing level of output is determined by its function.
reaction
Given an inverse demand function, P = a - b(Q + Q), and cost functions, C2Q2 a-Cl 1 —Q2 is the then, 2b 2
reaction function for firm 1.
Rank output levels from highest to lowest of the following industry models: Collusion, Cournot, Bertrand, and Stackelberg.
2 Stackelberg; 4 Collusion; 3 Cournot; 1 Bertrand
In general, in a market dominated by only a few firms, how do firms collude?
Agreeing to charge higher prices Agreeing to keep output low
Define the competitive firm's demand.
Df = P = MR
If the profits earned by the firm are the same in each period and the horizon is infinite, the present value of a firm is given by:
PV firm = (1+i/1) Pi
An oligopoly where each firm believes that rivals will lower their prices in response to a price decrease, but will not change their prices in response to a price increase is called a oligopoly.
Sweezy
Suppose a market contains a few firms, many consumers, differentiated products, and a belief by firm managers that other firms will match price decreases, but not price increases. What type of market is this?
Sweezy oligopoly
What is true of market price and output under a collusive agreement among oligopolists?
The are the same as in monopoly.
What is true of the effect of a change in marginal cost (MC) as it applies to Cournot and Sweezy oligopoly models?
The effect of a change in MC generally is very different in each model.
At what point does the price war in a Bertrand oligopoly with two firms end?
When P1 = P2 = MC
Do changes in marginal cost affect firms in Cournot oligopoly differently than in Sweezy oligopoly? Why or why not?
Yes. It is due to a firm's perception of how other firms will react to its decisions.
Given the following inverse market demand in a homogeneous-product Cournot duopoly: P = a - b(Ql+ Q), the marginal revenue of firm 1 equals
a - bQ2- 2bQ1
A simultaneous-move pricing game played by two firms is often called a game. duopoly
bertrand
In a sequential-move game, the player who moves first
cannot make decisions based on what the other player does.
When a monopolist increases output by one unit, total revenue
increases by less than price.
Warranties and guarantees can be analyzed using games.
infinitely repeated
Multiproduct firms that have cost complementarities tend to have firms producing a single product. marginal costs than
lower
The market structure where a firm has a large degree of market power is called
monopoly
For a perfectly competitive firm, marginal revenue is equal to the market
price
In a perfectly competitive market, the individual producer's demand curve is the market
price
Collusion leads to
price that exceeds marginal cost.
Marginal revenue is
the change in total revenue from a one-unit change in output.
If a market is perfectly contestable, existing firms are disciplined by
the threat of entry by new firms.
Inverse market demand is: P = 1,000 - (Ql+ 02). Costs for each firm are identical and given by: qq = 4Qi Determine the profit function for a Cournot oligopolist.
- (Ql+ - 4Qi
Indicate which of the following are applications of multistage games.
-Entry game -Innovation game -Sequential bargaining
In a repeated game with a known final period, why are promises to cooperate generally broken?
-Players understand that there is no effective punishment in the last period. -"Backwards unraveling" continues until players know that no punishment can be used in any period.
In order to be considered a subgame perfect equilibrium, a set of strategies must
-be a Nash equilibrium for each subgame. -be a Nash equilibrium.
In an infinitely repeated game,
-collusion is possible. -players receive payoffs during each play of the game
How does the U.S. patent system create monopolies?
Grants an inventor exclusive right to sell the product
Cheat - TT - TIN), where TICheat is the maximum one-shot payoff if the player Coop Suppose TT cheats, TICOOP is the cooperative, one-shot payoff, TIN is the one-shot Nash equilibrium payoff, and I IS the interest rate. What does the right-hand side of the equation represent?
The present value of what is given up in the future by cheating in the present.
The monopolist is restricted to price-quantity combinations that lie on the demand curve as a result of decisions made by
consumers
A market where all producers have access to the same technology, consumers respond quickly to price changes, firms cannot quickly lower price, and there are no sunk costs is called a(n) market.
contestable
Demand for a firm's product in oligopoly
depends on how other firms react to pricing decisions.
From the point-of-view of the consumer, Bertrand oligopoly is outcome similar to since it leads to an
desirable; perfect competition
Isoprofit curves
do not intersect.
strategy is one that results in the highest possible payoff independent of other players' actions.
dominant
When long-run average costs fall as output increases, we say that the firm experiences of scale. (1 word)
economies
When the total cost of producing two goods within the same firm is less than the cost of producing them in exist. (3 separate firms, words)
economies of scope
When the total cost of producing two goods within the same firm is less than the cost of producing them in separate firms, exist.
economies of scope
When firms in monopolistic competition earn positive economic profits, other firms tend to ___ the market.
enter
At the point where the cost curve C(Q) and the revenue line R(Q) are the farthest vertical distance apart, the marginal cost (MC) is marginal revenue (MR).
equal to
A perfectly competitive firm maximizes profits at a point where P MC is MC over the range where
equals; increasing
When firms in a competitive industry sustain losses, they will long run. the industry in the
exit
Games in which players know a game will end, but they do not know when the game will end are called games. (Enter one word in each blank)
fineitely repeated
The basic tool used to summarize profits in a Cournot oligopoly is a(n) curve.
isoprofit
If firms seek to be infinitely lived,
it does not pay to cheat customers if the one-time gain is offset by a loss in future sales.
In a finitely repeated game, a firm has no incentive to cheat if
it expects to earn less from cheating than from not cheating.
When firms know who their rivals are and who their rivals' customers are
it is easier to sustain a collusive agreement.
In a perfectly competitive firm, in the short run, a firm will shut down to minimize losses when price is average variable cost.
less than
Bertrand oligopoly and homogeneous products result in firms charging a price that equals (Enter one word in each blank)
marginal cost
Suppose a manager flips a coin to decide whether or not she should monitor employees' production. This is an example of a(n) (one word) strategy.
mixed
When many buyers and sellers freely enter and exit a market having similar, yet differentiated products, it is called
monopolistic competition
Fast-food hamburgers are characterized by a large group of sellers producing slightly different goods. What type of market is this?
monopolistically competitive
Economies of scale and scope, cost complementarity, and patents are all sources of power. (Enter one word in the blank.)
monopoly
Entry and exit into and out of a market can often be analyzed using which of the following game representations?
multistage games
When there are a few, relatively large firms in an industry, it is called
oligopoly
In order to maximize profits in the short run, a manager must determine how much output to produce given
only variable inputs within his control.
If the market for corn contains many buyers and sellers (none of whom can influence price), a homogeneous product, and free entry in the market, we consider the market to be
perfectly competitive
In the absence of a dominant strategy, a player might pursue a strategy that guarantees the highest payoff given the worst possible scenario. Such a strategy is call a(n)
secure strategy
A game in which a player moves after observing another player's move is called a move game. (Enter one word in the blank)
sequential
A period of time during which at least one input is fixed is called the run.
short
In the Sweezy model, pricing decisions are based on
strategic interaction among firms. beliefs about rivals' reactions to price changes.
In a monopoly, where the firm chooses output based on marginal revenue (which is less than price),
supply curves do not exist.
In an environment of interdependence where one firm's profits depend not only on the firm's actions, but on the actions of its rival firms, game
the game is played only once.
Due to the interdependent nature of an oligopolistic market, a firm manager who wishes to maximize profits must also consider
whether rival firms will match price changes.
Determine a key difference between monopolistic competition and monopoly.
In monopolist competition, there are other firms that sell similar products.
When increasing the output of one product reduces the marginal cost of another product, it is called
cost complementarity.
Suppose an industry contains a few firms, many consumers, differentiated or homogeneous products, barriers to entry, and a belief by firms that rivals will not change output if they change output. This is called a oligopoly.
cournot
If MR is less than MC, a profit-maximizing monopolist should:
decrease output to maximize profits
If P is less than AVC, the firm
should shut down is sustaining a loss
The inverse demand function for two firms in a homogeneous-product, Stackelberg oligopoly is P = 60 - (Q + 02) and costs for the two firms are CI(QI) = 401 AND, C2(Q2) = 402. Under these conditions, the market price equals $ .00
18 The leader's output is 28 and the follower's is 14. P = 60 - (28 + 14) = 18
A firm in monopolistic competition faces a demand curve with own-price elasticity equal to -5 and an advertising elasticity equal to 0.15. This firm should devote % of its revenues to advertising.
3 (.15/-(-5)) = 3
The inverse demand function for a monopolist is given by P = 50 - 40. If the profit-maximizing output level is 5 (QM = 5), the monopoly price is
30
Inverse market demand is: P = 1000 - (Ql+ 02). Costs for each firm are identical and given by: qq = 4Qi The price charged by each firm in a Bertrand oligopoly equals $
4 Price is equal to marginal cost ins a Bertrand oligopoly.
A firm in monopolistic competition faces a demand function equal to: P = 200 - 20, and a cost function equal to C(Q) = 10 + 40. The profit-maximizing level of output equals whole number.) units. (Round your answer to a
49
When an employee announces his intention to quit an existing job, he has an increased incentive to "shirk" work on his last (or next-to-last) day. Which of the following should be the ideal strategies adopted by a manager in this situation?
-Extend the rewards of good work beyond the employment period. -Offer a hard-working employee a better job reference.
Long-run properties of perfect competition include:
-P = min AC -p = MC
In order to sustain a cooperative outcome in an infinitely repeated game, players should
-punish a player that cheats by selecting the one-shot, Nash equilibrium strategy. -cooperate provided no player has ever cheated.
Inverse market demand is: P = 1,000 - (Ql+ 02). Costs for each firm are identical and given by: cq = 4Qi The profit earned by each firm in a Bertrand oligopoly equal $
0
For a given demand curve and cost function in a market with two firms, rank from highest to lowest the profit levels of the following firms: a Cournot duopolist, a Stackelberg leader, a Stackelberg follower, a Bertrand duopolist.
1 A Stackelberg leader 2 A Cournot duopolist 3 A Stackelberg follower 4 A Bertrand duopolist
The inverse demand function for two firms in a homogeneous-product, Stackelberg oligopoly is P = 60 - (Q + 02) and costs for the two firms are CI(QI) = 401 AND, C2(Q2) = 402. Under these conditions, the leader's output equals
28 a + c -2c Leader's output = 2b _ 60 + 4-2(4) = 28 2(1)
Inverse market demand is: P = 1,000 - (Ql+ 02). Costs for each firm are identical and given by: qq = 4Qi Output under a collusive agreement equals
498
Inverse market demand is: P = 1000 - (Ql+ 02). Costs for each firm are identical and given by: qq = 4Qi The profit earned by the follower in a Stackelberg oligopoly equals $
62001 The leader produce 498 units and the follower produces 249, for a total of 747 units in the market. The resulting market price is $253 and the follower earns $62,001 in profit.
A firm should shut down when P AVC?
<
Players find it in their interest to maintain a collusive agreement when Cheat Coop . (rrcoop - TTN)
<-
Why do firms in a Sweezy oligopoly resist changing their prices so long as marginal cost remains within a certain range?
Because of the effect of price changes on the behavior of rival firms.
Consider the payoffs for the following simultaneous, one-shot game: Firm A charges low, Firm B charges low: 0,0, (respectively) Firm A charges low, Firm B charges high: 50, -10 (respectively) Firm A charges high, Firm B charges low: -10, 50 (respectively) Firm A charges high, Firm B charges high: 10,10 (respectively) What is the outcome of the game?
Both charge low
Consider the following payoffs available to two firms in the United States, "A" and "B", in a one- shot game. When "A" and "B" both advertise: $3, $3, respectively When neither "A" nor "B" advertise: $12, $12, respectively When "A" advertises and "B" does not: $20, $2, respectively When "A" doesn't advertise and "B" does: $2, $20, respectively Why don't the firms agree to not advertise?
Both firms have an incentive to cheat.
In a simultaneous-move, one-shot game, a Nash outcome is often inferior to the outcome that would result if the firms colluded. Which of the following is a reason why firms do not collude to reach a "better" outcome?
Collusion is illegal in the U.S.
In a simultaneous-move, one-shot game, a Nash outcome is often inferior to the outcome that would result if the firms colluded. Why might collusion disintegrate among profit-seeking firms?
Each firm has an incentive to cheat in order to obtain higher profits.
In oligopoly, a manager maximizes profits at the point where
MR = MC
Given a revenue function: The monopolist's marginal revenue (MR) is given by
MR = dP/dQ Q+P MR = P(1+E)/E MR = dR/dQ
Profit maximization for the two-plant monopolist occurs when the monopolist uses resources such that
MR(Q) = MC(Q) and MR(Q) = MC2(Q) MC(Q) = MCJQ)
A criticism of sequential bargaining applications of multistage games includes which of the following?
Players don't know the true payoffs to other players.
A dispute between a firm and its stockholders over what to do with a $10 million surplus would likely be analyzed using which application of multistage games?
Sequential bargaining
What occurs if players know precisely when a repeated game will end?
The end-of-period problem
When strategies for a multistage game are a Nash equilibrium, but involve a threat that is not credible, then we say that these strategies
are not a subgame perfect equilibrium.
Consider the following payoffs available to two firms, "A" and "B", in a one-shot game. When "A" and "B" both advertise: $3, $3, respectively When neither "A" nor "B" advertise: $12, $12, respectively When "A" advertises and "B" does not: $20, $2, respectively When "A" doesn't advertise and "B" does: $2, $20, respectively
both advertise
If consumers are willing to pay more for "Roper's Rice" than they are for "Rice by Russell", then "Roper's Rice" is enjoying additional value due to
brand equity
When a few firms with market power agree to restrict output and/or charge higher price, it is called
collusion.
The welfare loss to society due to the level of output produced by a monopolist is called the loss of monopoly.
deadweight
In a Cournot oligopoly, managers believe that their output decisions
do not affect their rivals' output decisions.
equilibrium is a condition describing a set of strategies in which no player can make themselves better off by unilaterally changing their strategy, given the other players' strategy choices.
nash
The -form of a game indicates the number of players, the potential strategies, and the payoffs to alternative strategies.
normal
Multistage games permit players to make
sequential decisions.
Oligopolistic firms are more likely to collude and charge high prices in a finitely repeated game played an uncertain number of times if
there is a high probability that the game will be played in subsequent periods.
Suppose Player "A" adheres to the same action each time the game is played until Player "B" takes an action that causes Player "A" to shift his approach. Player "A" has adopted a strategy.
trigger
What happens in a perfectly competitive industry when firms earn profits?
Profits of remaining firms fall Supply increases Price falls
Determine the reaction function for firm 1 in a Cournot duopoly with an inverse demand curve given by: P = 12 - (Q + Q) and zero costs.
Q1 = R1(Q2) = 6 - 1/2 Q2
In perfect competition, profit equals
Revenues - cost
What is the key difference in determining the profit-maximizing price and output under monopoly versus monopolistic competition?
There is no difference.
In monopolistic competition, each firm uses the demand curve and the marginal revenue curve to establish output and price. In monopoly, the firm uses the demand curve and the marginal revenue curve to establish output and price.
individual; market
If P exceeds AVC but is less than ATC, the firm
is sustaining a loss. should remain open.
If the marginal cost of producing in Plant 1 exceeds the marginal cost of producing in Plant 2, the monopolist should
produce more in Plant 2 and less in Plant 1.
In order to maximize profits in the short run, a manager must determine how much output should be produced, given
only variable inputs within his or her control.
Inverse market demand is: P = 1,000 - (Ql+ 02). Costs for each firm are identical and given by: qq = 4Qi Under collusion, what is the inverse market demand curve?
p = 1,000 -Q
In the long run, firms in monopolistic competition produce a level of output where
p > MC P = ATC > minimum average costs
A market with many "small" buyers and sellers, identical products, no transaction costs, and free entry and exit where buyers and sellers have perfect information is called
perfect competition
a-c 1 r2(Q) = —E - —01 describes 2b 2
the output of the follower in a Stackelberg oligopoly. the Cournot reaction function of the follower in a Stackelberg model.
A function that defines the profit-maximizing level of output given the output levels of another firm is called a(n) (one word) function.
reaction
Given an inverse demand function, P = a - b(Q + Q), and cost functions, CIQI a-c I 2 - —QI is the then, 2b 2
reaction function for firm 2.
A firm in monopolistic competition faces a demand curve with own-price elasticity equal to -2 and an advertising elasticity equal to 0.2. This firm should devote of its revenues to advertising.
10
A firm in monopolistic competition faces a demand function equal to: P = 200 - 20, and a cost function equal to C(Q) = 10 + 40. The profit-maximizing price equals $ .00.
102
Inverse market demand is: P = 1,000 - (Ql+ 02). Costs for each firm are identical and given by: qq = 4Qi The profit earned by a Cournot oligopolist equals $
110224 Solving the two reaction functions results in QI = Q price of $336. Each firm earns a profit of $110,224. = 332. The total output in the market is 664, which yields a market
Inverse market demand is: P = 1,000 - (Ql+ 02). Costs for each firm are identical and given by: qq = 4Qi The profit earned by the leader in a Stackelberg oligopoly equals $
124002 The leader produce 498 units and the follower produces 249, for a total of 747 units in the market. The resulting market price is $253 and the leader earns $124,002 in profit.
The inverse demand function for two firms in a homogeneous-product, Stackelberg oligopoly is P = 60 - (Q + 02) and costs for the two firms are CI(QI) = 4Q AND, C (02) = 402. Under these conditions, the follower's output equals
14 The follower's output 60 4 1 — —Z— - —(28) = 14 2(1) 2 2b 2
To maximize profits, a perfectly competitive firm should produce in the range of increasing marginal cost where P = MC and
P > AVC
What is another name for a best-response function?
Reaction function
If firm 1 has first-mover advantage over firm 2 AND firm 2 maximizes profit given the output of firm 1, what type of industry is this?
Stackelberg oligopoly
Suppose a single firm (the leader) chooses output before all other firms (the followers). If the followers accept the leader's output and maximize profits based on the leader's given level of output, then this industry is characterized as a(n) (one word) oligopoly.
Stackelberg.