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Exam 17: Oligopoly

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Question 91

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Even when allowed to collude, firms in an oligopoly may choose to cheat on their agreements with the rest of the cartel. Why?

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Individual profits can be incr...

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Question 92

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Table 17-15 Suppose that two coal mining companies - Allied and Barclay - own adjacent land suitable for excavating coal mines. The profits that each firm earns depends on both the number of mines it excavates and the number of mines excavated by the other firm. The table below lists each firm's individual profits: Allied Excavate one mine Excavate two mines -Refer to Table 17-15. Is there a Nash equilibrium? If so, describe it.

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Yes. Allied has a dominant strategy to e...

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Question 93

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Table 17-7 Two companies, Wonka and Gekko, each decide whether to produce a good quality product or a poor quality product. In the figure, the dollar amounts are payoffs and they represent annual profits (in millions of dollars) for the two companies. -Refer to Table 17-7. The more frequently this game is played, the more likely it is that

Table 17-1 Imagine a small town in which only two residents, Sydney and Matthew, own wells that produce safe drinking water. Each week Sydney and Matthew work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Sydney and Matthew can pump as much water as they want without cost so that the marginal cost of water equals zero. The town's weekly demand schedule and total revenue schedule for water is shown in the following table: ​ ​ $\begin{array} { | c | c | c | } \hline \begin{array} { c } \text { Quantity } \\\text { (Gallons) }\end{array} & \begin{array} { c } \text { Price } \\\text { (Dollars per gallon) }\end{array} & \begin{array} { c } \text { Total Revenue and Total Profit } \\\text { (Dollars) }\end{array} \\\hline 0 & 48 & 0 \\\hline 90 & 44 & 3,960 \\\hline 180 & 40 & 7,200 \\\hline 270 & 36 & 9,720 \\\hline 360 & 32 & 11,520 \\\hline 450 & 28 & 12,600 \\\hline 540 & 24 & 12,960 \\\hline 630 & 20 & 12,600 \\\hline 720 & 16 & 11,520 \\\hline 810 & 12 & 9,720 \\\hline 900 & 8 & 7,200 \\\hline 990 & 4 & 3,960 \\\hline 1,080 & 0 & 0 \\\hline\end{array}$ ​ -Refer to Table 17-1. If Sydney and Matthew operate as a profit-maximizing monopoly in the market for water, how much profit will each of them earn, assuming that the two producers split the market equally?

Table 17-4 Only two firms, JKL and XYZ, sell a particular product. The following table shows the demand curve for their product. Each firm has the same constant marginal cost of $8 and zero fixed cost. ​ ​ $\begin{array} { | c | c | c | } \hline \begin{array} { c } \text { Price } \\\text { (Dollars per unit) }\end{array} & \begin{array} { c } \text { Quantity Demanded } \\\text { (Units) }\end{array} & \begin{array} { c } \text { Total Revenue } \\\text { (Dollars) }\end{array} \\\hline 28 & 0 & 0 \\\hline 26 & 5 & 130 \\\hline 24 & 10 & 240 \\\hline 22 & 15 & 330 \\\hline 20 & 20 & 400 \\\hline 18 & 25 & 450 \\\hline 16 & 30 & 480 \\\hline 14 & 35 & 490 \\\hline 12 & 40 & 480 \\\hline 10 & 45 & 450 \\\hline 8 & 50 & 400 \\\hline 6 & 55 & 330 \\\hline 4 & 60 & 240 \\\hline 2 & 65 & 130 \\\hline 0 & 70 & 0 \\\hline\end{array}$ ​ -Refer to Table 17-4. JKL and XYZ agree to maximize joint profits. However, while JKL produces the agreed-upon amount, XYZ breaks the agreement and produces 5 more than agreed. How much profit does XYZ make?

Table 17-15 Suppose that two coal mining companies - Allied and Barclay - own adjacent land suitable for excavating coal mines. The profits that each firm earns depends on both the number of mines it excavates and the number of mines excavated by the other firm. The table below lists each firm's individual profits: Allied Excavate one mine Excavate two mines -Refer to Table 17-15. Does Allied have a dominant strategy? If so, describe it.

Table 17-6 Two home-improvement stores (Lopes and HomeMax) in a growing urban area are interested in expanding their market share. Both are interested in expanding the size of their store and parking lot to accommodate potential growth in their customer base. The following game depicts the strategic outcomes that result from the game. Increases in annual profits (in millions of dollars) of the two home-improvement stores are shown in the following figure. ​ -Refer to Table 17-6. When this game reaches a Nash equilibrium, annual profit will grow by

Suppose a market is initially perfectly competitive with many firms selling an identical product. Over time, however, suppose the merging of firms results in the market being served by only three or four firms selling this same product. As a result, we would expect

Table 17-2 The information in the following table shows the total demand for internet radio subscriptions in a small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost of $20,000 (per year) and that the marginal cost of providing an additional subscription is always $16. ​ ​ $\begin{array} { | c | c | } \hline \begin{array} { c } \text { Quantity Demanded } \\\text { (Internet radio } \\\text { sub scriptions) }\end{array} & \begin{array} { c } \text { Price } \\\text { (Dollars per subscription } \\\text { per year) }\end{array} \\\hline 0 & 64 \\\hline 500 & 60 \\\hline 1,000 & 56 \\\hline 1,500 & 52 \\\hline 2,000 & 48 \\\hline 2,500 & 44 \\\hline 3,000 & 40 \\\hline 3,500 & 36 \\\hline 4,000 & 32 \\\hline 4,500 & 28 \\\hline 5,000 & 24 \\\hline 5,500 & 20 \\\hline 6,000 & 16 \\\hline 6,500 & 12 \\\hline 7,000 & 8 \\\hline 7,500 & 4 \\\hline 8,000 & 0 \\\hline\end{array}$ ​ -Refer to Table 17-2. Suppose there is only one internet radio provider in this market and it seeks to maximize its profit. The company will

Table 17-7 Two companies, Wonka and Gekko, each decide whether to produce a good quality product or a poor quality product. In the figure, the dollar amounts are payoffs and they represent annual profits (in millions of dollars) for the two companies. -Juan Pablo and Zak are competitors in a local market. Each is trying to decide if it is better to advertise on TV, on radio, or not at all. If they both advertise on TV, each will earn a profit of $8,000. If they both advertise on radio, each will earn a profit of $14,000. If neither advertises at all, each will earn a profit of $20,000. If one advertises on TV and other advertises on radio, then the one advertising on TV will earn $12,000 and the other will earn $10,000. If one advertises on TV and the other does not advertise, then the one advertising on TV will earn $22,000 and the other will earn $4,000. If one advertises on radio and the other does not advertise, then the one advertising on radio will earn $24,000 and the other will earn $8,000. If both follow their dominant strategy, then Juan Pablo will

Economists use game theory to analyze __________.

Table 17-1 Imagine a small town in which only two residents, Sydney and Matthew, own wells that produce safe drinking water. Each week Sydney and Matthew work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Sydney and Matthew can pump as much water as they want without cost so that the marginal cost of water equals zero. The town's weekly demand schedule and total revenue schedule for water is shown in the following table: ​ ​ $\begin{array} { | c | c | c | } \hline \begin{array} { c } \text { Quantity } \\\text { (Gallons) }\end{array} & \begin{array} { c } \text { Price } \\\text { (Dollars per gallon) }\end{array} & \begin{array} { c } \text { Total Revenue and Total Profit } \\\text { (Dollars) }\end{array} \\\hline 0 & 48 & 0 \\\hline 90 & 44 & 3,960 \\\hline 180 & 40 & 7,200 \\\hline 270 & 36 & 9,720 \\\hline 360 & 32 & 11,520 \\\hline 450 & 28 & 12,600 \\\hline 540 & 24 & 12,960 \\\hline 630 & 20 & 12,600 \\\hline 720 & 16 & 11,520 \\\hline 810 & 12 & 9,720 \\\hline 900 & 8 & 7,200 \\\hline 990 & 4 & 3,960 \\\hline 1,080 & 0 & 0 \\\hline\end{array}$ ​ -Refer to Table 17-1. Suppose the town enacts new antitrust laws that prohibit Sydney and Matthew from operating as a monopoly. What will be the price of water once Sydney and Matthew reach a Nash equilibrium?

Explain how the output effect and the price effect influence the production decision of the individual oligopolist.

Table 17-3 The table shows the demand schedule for a particular product. ​ ​ $\begin{array} { | c | c | } \hline \begin{array} { c } \text { Quantity Demanded } \\\text { (Units) }\end{array} & \begin{array} { c } \text { Price } \\\text { (Dollars per unit) }\end{array} \\\hline 0 & 16 \\\hline 1 & 14 \\\hline 2 & 12 \\\hline 3 & 10 \\\hline 4 & 8 \\\hline 5 & 6 \\\hline 6 & 4 \\\hline 7 & 2 \\\hline 8 & 0 \\\hline\end{array}$ ​ ​ -Refer to Table 17-3. Suppose the market for this product is served by two firms that have formed a cartel. If the marginal cost of production is $4 and each firm incurs a fixed cost of $6, the combined profit of the cartel will be

Reaching and enforcing an agreement between members of a cartel becomes more difficult as the size of the group __________.

Table 17-2 The information in the following table shows the total demand for internet radio subscriptions in a small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost of $20,000 (per year) and that the marginal cost of providing an additional subscription is always $16. ​ ​ $\begin{array} { | c | c | } \hline \begin{array} { c } \text { Quantity Demanded } \\\text { (Internet radio } \\\text { sub scriptions) }\end{array} & \begin{array} { c } \text { Price } \\\text { (Dollars per subscription } \\\text { per year) }\end{array} \\\hline 0 & 64 \\\hline 500 & 60 \\\hline 1,000 & 56 \\\hline 1,500 & 52 \\\hline 2,000 & 48 \\\hline 2,500 & 44 \\\hline 3,000 & 40 \\\hline 3,500 & 36 \\\hline 4,000 & 32 \\\hline 4,500 & 28 \\\hline 5,000 & 24 \\\hline 5,500 & 20 \\\hline 6,000 & 16 \\\hline 6,500 & 12 \\\hline 7,000 & 8 \\\hline 7,500 & 4 \\\hline 8,000 & 0 \\\hline\end{array}$ ​ -Refer to Table 17-2. Assume that there are two profit-maximizing internet radio providers operating in this market. Further assume that they are not able to collude on the price and quantity of subscriptions to sell. How much profit will each firm earn when this market reaches a Nash equilibrium?

Table 17-2 The information in the following table shows the total demand for internet radio subscriptions in a small urban market. Assume that each company that provides these subscriptions incurs an annual fixed cost of $20,000 (per year) and that the marginal cost of providing an additional subscription is always $16. ​ ​ $\begin{array} { | c | c | } \hline \begin{array} { c } \text { Quantity Demanded } \\\text { (Internet radio } \\\text { sub scriptions) }\end{array} & \begin{array} { c } \text { Price } \\\text { (Dollars per subscription } \\\text { per year) }\end{array} \\\hline 0 & 64 \\\hline 500 & 60 \\\hline 1,000 & 56 \\\hline 1,500 & 52 \\\hline 2,000 & 48 \\\hline 2,500 & 44 \\\hline 3,000 & 40 \\\hline 3,500 & 36 \\\hline 4,000 & 32 \\\hline 4,500 & 28 \\\hline 5,000 & 24 \\\hline 5,500 & 20 \\\hline 6,000 & 16 \\\hline 6,500 & 12 \\\hline 7,000 & 8 \\\hline 7,500 & 4 \\\hline 8,000 & 0 \\\hline\end{array}$ ​ -Refer to Table 17-2. Assume there are two internet radio providers that operate in this market. If they are able to collude on the quantity of subscriptions that will be sold and on the price that will be charged for subscriptions, then their agreement will stipulate that

Describe the source of tension between cooperation and self-interest in a market characterized by oligopoly. Use an example of an actual cartel arrangement to demonstrate why this tension creates instability in cartels.

Table 17-7 Two companies, Wonka and Gekko, each decide whether to produce a good quality product or a poor quality product. In the figure, the dollar amounts are payoffs and they represent annual profits (in millions of dollars) for the two companies. -Two suspected drug dealers are stopped by the highway patrol for speeding. The officer searches the car and finds a small bag of marijuana and arrests the two. During the interrogation, each is separately offered the following: "If you confess to dealing drugs and testify against your partner, you will be given immunity and released while your partner will get 10 years in prison. If you both confess, you will each get 5 years." If neither confesses, there is no evidence of drug dealing, and the most they could get is one year each for possession of marijuana. If each suspected drug dealer follows a dominant strategy, what should he/she do?

Table 17-1 Imagine a small town in which only two residents, Sydney and Matthew, own wells that produce safe drinking water. Each week Sydney and Matthew work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Sydney and Matthew can pump as much water as they want without cost so that the marginal cost of water equals zero. The town's weekly demand schedule and total revenue schedule for water is shown in the following table: ​ ​ $\begin{array} { | c | c | c | } \hline \begin{array} { c } \text { Quantity } \\\text { (Gallons) }\end{array} & \begin{array} { c } \text { Price } \\\text { (Dollars per gallon) }\end{array} & \begin{array} { c } \text { Total Revenue and Total Profit } \\\text { (Dollars) }\end{array} \\\hline 0 & 48 & 0 \\\hline 90 & 44 & 3,960 \\\hline 180 & 40 & 7,200 \\\hline 270 & 36 & 9,720 \\\hline 360 & 32 & 11,520 \\\hline 450 & 28 & 12,600 \\\hline 540 & 24 & 12,960 \\\hline 630 & 20 & 12,600 \\\hline 720 & 16 & 11,520 \\\hline 810 & 12 & 9,720 \\\hline 900 & 8 & 7,200 \\\hline 990 & 4 & 3,960 \\\hline 1,080 & 0 & 0 \\\hline\end{array}$ ​ -Refer to Table 17-1. What is the socially efficient quantity of water?