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Exam 9: Basic Oligopoly Models

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Question 71

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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,the official dealer of Chrysler? Why?

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Other things equal,your sales would rise...

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Question 72

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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 preceding answers is correct.

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Question 73

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The profits of the follower in a Stackelberg duopoly:

Which of the following is a feature of a contestable market?

Suppose that the duopolists competing in Cournot fashion agree to produce the collusive output.Given that firm 2 commits to this collusive output,it pays firm 1 to:

What real-world evidence would lead you to believe that firms were acting as Cournot oligopolists? Stackelberg oligopolists? Bertrand oligopolists?

Firm A has a higher marginal cost than firm B.They compete in a homogeneous product Bertrand duopoly.Which of the following results will NOT occur?

In the presence of large sunk costs,which of the following market structures generally leads to the highest price?

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 P = 22,500 - 75Q,where $\mathbf { Q } = \sum _ { \mathbf { i } = 1 } ^ { \mathbf { n } } \mathbf { Q } _ { \mathbf { i } }$ .You estimate that if you enter the market,your own cost function will be C_y(Q_y)= 15,300Q_y .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 currently 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?

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:

If firms are in Cournot equilibrium:

Consider two firms competing to sell a homogeneous product by setting price.The inverse demand curve is given by P = 20 − Q.Firm 1 has MC₁(Q₁) = 2 and firm 2 has MC₂(Q₂) = 2.25.Based on this information,we can conclude that the market price will be:

The (inverse)demand in a Cournot duopoly is P = a - b (Q₁ + Q₂),and costs are C₁(Q₁)= c₁Q₁ and C₂(Q₂)= c₂Q₂. Show that the Cournot equilibrium levels of output are $Q _ { 1 } = \frac { a + c _ { 2 } - 2 c _ { 1 } } { 3 b }$ and $Q _ { 2 } = \frac { a + c _ { 1 } - 2 c _ { 2 } } { 3 b }$ .

The Cournot theory of oligopoly assumes rivals will:

If firms are in Cournot equilibrium,they could increase profits by: