A duopoly faces an inverse market demand function P(y) = 120 − y. Firm 1 has a marginal cost of $40. And Firm 2’s marginal cost is $20. a. Calculate the output of each firm, market output, and profit in the Cournot outcome. b. Calculate the output of each firm, market output, and profit when two firms collude and become a cartel and the total profit is shared equally between two firms. Argue whether this cartel structure is economically meaningful.

A duopoly faces an inverse market demand function P(y) = 120 − y. Firm 1 has a marginal cost of $40. And Firm 2’s marginal cost is $20. a. Calculate the output of each firm, market output, and profit in the Cournot outcome. b. Calculate the output of each firm, market output, and profit when two firms collude and become a cartel and the total profit is shared equally between two firms. Argue whether this cartel structure is economically meaningful.

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter15: Oligopoly And Strategic Behavior

Section: Chapter Questions

Problem 3P

See similar textbooks

Similar questions

The table shows the demand schedule for a particular product. Quantity Price 0 100 300 90 600 80 900 70 1200 60 1500 50 1800 40 2100 30 2400 20 2700 10 3000 0 Suppose the market for this product is served by two firms who have formed a cartel and are colluding to set the price and quantity in this market. If the marginal cost to produce this product is constant at $40 per unit, then what price will the cartel set in this market? a. $40 b. $50 c. $60 d. $70 e. $80
Consider an industry with two firms, each having marginal costs and total costs equal to zero. The industry demand is P = 100 − Q where Q = Q1 + Q2 is total output. 4. If the firms interact only once, is there a profitable deviation (cheating) from cartel for any firm? Find the profit of the firms in case of cheating. If a firm deviates from cartel (cheats) it will play its profit maximizing quantity, which is the quantity on its best response function. Now, use the best response function of firm 1 to find firm 1's cheating quantity, when firm 2 follows the rules of the cartel. Use the demand curve to find the new price level and then calculate profits. 5. Design a 2x2 normal form payoff matrix with strategies cartel and cheat. Complete the payoffs using the profits you calculated in the previous parts. Firm 2 Cartel Cheat Firm 1 Cartel Cheat 6. Now, assume that players interact twice. Hence the game is a twice repeated game. Is it possible to have (cartel,cartel) as an outcome?…
Isolated Island has two natural gas wells, one owned by Tom and the other owned by Jerry. Each well has a valve that controls the rate of flow of gas. The marginal cost of producing gas is $12 a unit. The table gives the demand schedule for gas on this island If Tom and Jerry form a cartel and maximize their joint profit, what will be the price of gas and the total quantity produced? If Tom and Jerry form a cartel and maximize their joint profit, the price of a unit of gas is $ and the quantity produced is units a day Q Search Price (dollars per unit) 36 33 30 27 24 21 18 15 Quantity demanded (units per day) 0 1 2 3 4 5 6 7 Next
Breakdown of a cartel agreement Consider a town in which only two residents, Darnell and Eleanor, own wells that produce water safe for drinking. Darnell and Eleanor can pump and sell as much water as they want at no cost. For them, total revenue equals profit. The following table shows the town's demand schedule for water. (base to table 1) Suppose Darnell and Eleanor form a cartel and behave as a monopolist. The profit-maximizing price is $_____ per gallon, and the total output is _____ gallons. As part of their cartel agreement, Darnell and Eleanor agree to split production equally. Therefore, Darnell's profit is $_______, and Eleanor's profit is $______. Suppose that Darnell and Eleanor have been successfully operating as a cartel. They each charge the monopoly price and sell half of the monopoly quantity. Then one night before going to sleep, Darnell says to himself, "Eleanor and I aren't the best of friends anyway. If I increase my production to 45 gallons more than…
Based on the demand schedule, at what quantity should the firms under duopoly and collusion will agree to produce? Explain.
Consider an oligopoly in which firms choose quantities. The inverse market demand curve is given by P = a - b (9₁ +92), where 9₁ is the quantity produced by Firm 1, and 92 is the quantity produced by Firm 2. Each firm has a marginal cost equal to c. 1. What is the equilibrium market quantity if the two firms acted as a cartel (i.e., attempt to set prices and outputs together to maximize total industry profits). How about the equilibrium market price? 2. Instead of cartel, suppose now firm 1 acts as the leader and firm 2 acts as the follower. What is the Stackelberg equilibrium quantities determined by each firm? What is the equilibrium market price? π2 3. Find using the Stackelberg quantities and price. Whose profit is higher?
Gotcha, the only seller of stun guns, faces the inverse market demand curve, P = 400 - 120, where Q measures the number of stun guns sold per day, and P is the price per stun gun. The marginal cost is constant at $64. Suppose a new firm, Ouchy, enters the stun gun market. Ouchy's marginal cost is also constant at $64. Gotcha and Ouchy agree to form a cartel and evenly split the market output. Gotcha holds to the agreement, but Ouchy decides to produce 5 more stun guns than its level under the cartel agreement. In this case, the market price is $. 172 192 232 205