Chapter 09 - Basic Oligopoly Models

Chapter 09
Basic Oligopoly Models

MultipleChoiceQuestions

1.TheCournottheoryofoligopolyassumesrivalswill
A.Keeptheiroutputconstant
b.Increasetheiroutputwheneverafirmincreasesitsoutput
c.Decreaseoutputwheneverafirmincreasesitsoutput
d.Followthelearningcurve

Difficulty:Easy

2.Whichofthefollowingistrue?
a.InBertrandoligopolyeachfirmbelievesthattheirrivalswillholdtheiroutputconstantifit
changesitsoutput
b.InCournotoligopolyfirmsproduceanidenticalproductataconstantmarginalcostand
engageinpricecompetition
c.Inoligopolyachangeinmarginalcostneverhasanaffectonoutputorprice
D.Noneofthestatementsassociatedwiththisquestionaretrue

Difficulty:Medium

3.InaSweezyOligopoly,adecreaseinafirm'smarginalcostgenerallyleadsto:
a.Reducedoutputandahigherprice
b.Increasedoutputandalowerprice
c.Higheroutputandahigherprice
D.Noneofthestatementsassociatedwiththisquestionaretrue

Difficulty:Easy

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4.Bertrandmodelofoligopolyrevealsthat
a.Capacityconstraintsarenotimportantindeterminingmarketperformance
B.Perfectlycompetitivepricescanariseinmarketswithonlyafewfirms
c.Changesinmarginalcostdonotaffectprices
d.Allofthestatementsassociatedwiththisquestionaretrue

Difficulty:Easy

5.Whichofthefollowingarequantitysettingoligopolymodels?
a.Stackelberg
b.Cournot
c.Bertrand
D.StackelbergandCournot

Difficulty:Easy

6.Whichofthefollowingarepricesettingoligopolymodels?
a.Stackelberg
b.Cournot
C.Bertrand
d.CournotandStackelberg

Difficulty:Easy

7.BothfirmsinaCournotduopolywouldenjoyhigherprofitsif
A.ThefirmssimultaneouslyreducedoutputbelowtheNashequilibriumlevel
b.EachfirmsimultaneouslyincreasedoutputabovetheNashequilibriumlevel
c.OnefirmreducedoutputbelowtheCournotNashequilibriumlevel,whiletheotherfirm
continuedtoproduceitsCournotNashequilibriumoutput
d.ThefirmssimultaneouslyreducedoutputbelowtheNashequilibriumlevelandonefirm
reducedoutputbelowtheCournotNashequilibriumlevel,whiletheotherfirmcontinuedto
produceitsCournotNashequilibriumoutput

Difficulty:Hard

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8.WhichofthefollowingisnotafeatureofSweezyoligopoly?
a.Therearetwofirmsinthemarketservingmanyconsumers
B.Thefirmsproducehomogenousproducts
c.Eachfirmbelievesthatrivalswillcuttheirpricesinresponsetoapricereduction,butwill
notraisetheirpricesinresponsetoapriceincrease
d.Barrierstoentryexist

Difficulty:Medium

9.WhichofthefollowingisaprofitmaximizingconditionforaCournotoligopolist?
A.MR=MC
b.Q1=Q2=...=Qn
c.P=MR
d.Allofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

10.AnewfirmentersamarketwhichisinitiallyservicedbyaBertrandduopolycharginga
priceof$20.Whatwillthenewpricebeshouldthethreefirmscoexistaftertheentry?
a.$25
B.$20
c.$15
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Hard

11."Anoligopolyisanoligopoly.Firmsbehavethesamenomatterwhattypeofoligopolyit
is."Thisstatementis:
a.True
B.False
c.Trueofhomogeneousproductindustries
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

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Chapter 09 - Basic Oligopoly Models

12."TomandJackaretheonlytwolocalgasstations.Althoughtheyhavedifferentconstant
marginalcosts,theybothsurvivecontinuedcompetition."TomandJackdonotconstitutea:
a.Sweezyoligopoly
b.Cournotoligopoly
c.Stackelbergoligopoly
D.Bertrandoligopoly

Difficulty:Medium

13.Amarketisnotcontestableif:
a.Allproducershaveaccesstothesametechnology
b.Consumersrespondquicklytoapricechange
c.Existingfirmscannotrespondquicklytoentrybyloweringtheirprice
D.Therearesunkcosts

Difficulty:Easy

14.FirmAhasahighermarginalcostthanfirmB's.Theycompeteinahomogeneousproduct
Cournotduopoly.Whichofthefollowingresultswillnotoccur?
a.QA<QB
b.ProfitA<ProfitB
c.RevenueoffirmA<RevenueoffirmB
D.PriceA<PriceB

Difficulty:Easy

15.IffirmscompeteinaCournotfashion,theneachfirmviewsthe
A.Outputoftherivalasgiven
b.Pricesofrivalsasgiven
c.Profitsofrivalsasgiven
d.Allofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

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16.TwofirmscompeteinaStackelbergfashionandfirmtwoistheleader,then
A.Firmoneviewstheoutputoffirmtwoasgiven
b.Firmtwoviewstheoutputoffirmoneasgiven
c.Allofthestatementsassociatedwiththisquestionarecorrect
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Hard

17.Withlineardemandandconstantmarginalcost,aStackelbergleader'sprofitsare
___________thefollower.
a.Lessthan
b.Equalto
C.Greaterthan
d.Eitherlessthanorgreaterto

Difficulty:Medium

18.Anoligopolistfacesademandcurvethatissteeperathigherpricesthanatlowerprices.
Whichofthefollowingismostlikely?
a.ThefirmcompeteswithothersintheCournotfashion
B.Otherfirmsmatchpriceincreasesbutdonotmatchpricereductions
c.Otherfirmsmatchpricereductionsbutdonotmatchpricechanges
d.ThefirmcompeteswithothersintheBertrandfashion

Difficulty:Medium

19.Whenfirm1enjoysafirstmoveradvantageinaStackelbergduopoly,itwill:
a.Producemoreoutputandchargealowerpricethanfirm2
B.Producemoreoutputandchargethesamepriceasfirm2
c.Producelessoutputandchargethesamepriceasfirm2
d.Producelessoutputandchargeahigherpricethanfirm2

Difficulty:Medium

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20.Aslightincreaseinthemarginalcostofafirmdefinitelyleadstoareductioninitsoutput
ifthefirmcompetesinthe:
a.Sweezyfashion
b.Cournotfashion
c.Bertrandfashion
D.CournotfashionandBertrandfashion

Difficulty:Hard

21.ThemarketdemandinaBertrandduopolyisP=103Q,andthemarginalcostsare$1.
Fixedcostsarezeroforbothfirms.Whichofthefollowingstatement(s)is/aretrue?
a.P=$1
b.ProfitsofFirmOne=profitsofFirmTwo
c.Producer'ssurplusofFirmOne=producer'ssurplusofFirmTwo
D.Allofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Easy

22.IffirmsareinCournotequilibrium:
a.Eachfirmcouldincreaseprofitsbyunilaterallyincreasingoutput
b.Eachfirmcouldincreaseprofitsbyunilaterallydecreasingoutput
c.Firmscouldincreaseprofitsbyjointlyincreasingoutput
D.Firmscouldincreaseprofitsbyjointlyreducingoutput

Difficulty:Easy

23.Afirm'sisoprofitcurveisdefinedasthecombinationsofoutputsproducedby:
a.Afirmthatearnsitthesamelevelofprofits
B.Allfirmsthatyieldthefirmthesamelevelofprofit
c.Allfirmsthatmakestotalindustryprofitsconstant
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Easy

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24.TwoidenticalfirmscompeteasaCournotduopoly.ThedemandtheyfaceisP=100
2Q.ThecostfunctionforeachfirmisC(Q)=4Q.Theequilibriumoutputofeachfirmis:
a.8
B.16
c.32
d.36

Difficulty:Medium

25.TwoidenticalfirmscompeteasaCournotduopoly.ThedemandtheyfaceisP=100
2Q.ThecostfunctionforeachfirmisC(Q)=4Q.Eachfirmearnsequilibriumprofitsof:
a.$1,024
b.$2,048
c.$4,096
D.$512

Difficulty:Medium

26.TwoidenticalfirmscompeteasaCournotduopoly.ThedemandtheyfaceisP=100
2Q.ThecostfunctionforeachfirmisC(Q)=4Q.Inequilibrium,thedeadweightlossis:
a.$128
B.$256
c.$384
d.$512

Difficulty:Hard

27.WhichofthefollowingstatementsisnotaconditionforaStackelbergoligopoly?
A.Themarketiscontestable
b.Barrierstoentryexist
c.Asinglefirm(theleader)selectsanoutputbeforeallotherfirmschoosetheiroutputs
d.Thefirmsproduceeitherdifferentiatedorhomogeneousproducts

Difficulty:Easy

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28.Withalinearinversedemandfunctionandthesameconstantmarginalcostsforbothfirms
inahomogeneousproductStackelbergduopoly,whichofthefollowingwillresult?
a.Profitsofleader>Profitsoffollower
b.QL=2QF
c.PL>PF
D.Profitsofleader>ProfitsoffollowerandQL=2QF

Difficulty:Medium

29.SupposethattheduopolistscompetinginCournotfashionagreetoproducethecollusive
output.Giventhatfirmtwocommitstothiscollusiveoutput,itpaysfirmoneto
A.Cheatbyproducingahigherlevelofoutput
b.Cheatbyproducingalowerlevelofoutput
c.Cheatbyraisingprices
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

30.TwofirmscompeteasaStackelbergduopoly.ThedemandtheyfaceisP=1003Q.The
costfunctionforeachfirmisC(Q)=4Q.Theoutputsofthetwofirmsare:
A.QL=16;QF=8
b.QL=24;QF=12
c.QL=12;QF=8
d.QL=20;QF=15

Difficulty:Medium

31.TwofirmscompeteasaStackelbergduopoly.ThedemandtheyfaceisP=1003Q.The
costfunctionforeachfirmisC(Q)=4Q.Theprofitsofthetwofirmsare:
A.L=$384;F=$192
b.L=$192;F=$91
c.L=$56;F=$28
d.L=$56;F=$28

Difficulty:Hard

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32.Fromaconsumer'spointofview,whichtypeofoligopolyismostdesirable?
a.Sweezy
b.Cournot
c.Stackelberg
D.Bertrand

Difficulty:Easy

33.Collusioninoligopolyisdifficulttoachievebecause:
a.Itisprohibitedbylaw
b.Everyfirmhasanincentivetocheatgiventhatothersfollowtheagreement
c.Firmsusuallytakecareofconsumers'interestsasadecisionpriority
D.Itisprohibitedbylawandeveryfirmhasanincentivetocheatgiventhatothersfollowthe
agreement

Difficulty:Medium

34.SincetheendofthewarinthePersianGulf,theworldpriceofoilhasfallen.Butinsome
areas,consumershaveseenlittlereliefatthepump.Thisphenomenoncanbeexplainedbythe
theoryof:
a.Perfectcompetition
b.Monopolisticcompetition
C.Oligopoly
d.Monopoly

Difficulty:Medium

35.Thespiritofequatingmarginalcostwithmarginalrevenueisnotheldby
a.Perfectlycompetitivefirms
b.Oligopolisticfirms
c.Perfectlycompetitivefirmsandoligopolisticfirms
D.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Easy

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36.MCIannouncedapricediscountplanforsmallfirms.Theirstockimmediatelyfellin
price.Thisshowsthat:
A.MCIisprobablycompetinginaBertrandoligopolisticindustry
b.Stockholdersaresometimesnotrational
c.ThereisincreaseddemandforMCI'sstock
d.AT&TsoldoutitsstockofMCIjustaftertheannouncement

Difficulty:Easy

37.Anoligopolisthasamarginalrevenuecurvethatjumpsdownat500unitsofoutput.What
kindofoligopolydoesthefirmmostlikelybelongto?
A.Sweezy
b.Cournot
c.Stackelberg
d.Bertrand

Difficulty:Easy

38.Therearemanydifferentmodelsofoligopolybecause:
a.Beliefsplayanimportantroleinoligopolisticcompetition
b.Firmsdonotmaximizeprofitsinoligopolisticcompetition
c.Oligopolyisthemostcomplicatedtypeofmarketstructure
D.Beliefsplayanimportantroleinoligopolisticcompetitionandoligopolyisthemost
complicatedtypeofmarketstructure

Difficulty:Easy

39.Whichofthefollowingisnotatypeofmarketstructure?
a.Monopolisticcompetition
b.Perfectcompetition
C.Monopolisticoligopoly
d.Monopoly

Difficulty:Easy

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40.Edjustfinishedanempiricalstudyofoligopoly.Hefoundthefollowingresult:"Inthe
examinedindustry,afirm'sdemandcurveissuchthatotherfirm'smatchpriceincreasesbut
donotmatchpricereductions."Whatkindofoligopolyistheexaminedindustry?
a.Sweezymodel
b.Cournotmodel
c.Stackelbergmodel
D.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

41.Whichofthefollowingistrue:
a.Ifthereareonlytwofirmsinamarket,pricesmustbeabovemarginalcost
b.Ifthereisonlyonefirminamarket,pricesmustbeabovemarginalcost
c.Allofthestatementsassociatedwiththisquestionarecorrect
D.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Hard

42.Whichfirmwouldyouexpecttomakethelowestprofits,otherthingsequal:
A.Bertrandoligopolist
b.Cournotoligopolist
c.Sweezyoligopolist
d.Stackelbergleader

Difficulty:Medium

43.Whichwouldyouexpecttomakethehighestprofits,otherthingsequal?
a.Bertrandoligopolist
b.Cournotoligopolist
C.Stackelbergleader
d.Stackelbergfollower

Difficulty:Medium

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44.WhenfirmoneactsasaStackelbergleader:
a.Firmtwoproducesthemonopolyoutput
b.Firmone'sprofitislessthanitsprofitiftheycompeteinaCournotfashion
c.FirmtwowillearnmorethaniftheycompeteinaCournotfashion
D.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Hard

45.FirmoneandfirmtwocompeteasaCournotoligopoly.Thereisanincreaseinmarginal
costforfirmone.Whichofthefollowingisnottrue?
a.Firmonewillproduceless
b.Firmtwowillproducemore
C.Bothfirmone'sandfirmtwo'sreactionfunctionsareshifted
d.Profitsoffirmonewilldecrease

Difficulty:Medium

46.Twofirmsproducedifferentgoods.Firmonehasapositiveslopedreactionfunction.This
canbeexplainedbestby
a.HomogeneousproductCournotoligopoly
b.HomogeneousproductBertrandoligopoly
C.HeterogeneousproductBertrandoligopoly
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Hard

47.AduopolyinwhichbothfirmshaveaLernerindexofmonopolypowerequalto0is
probablya:
a.Sweezyoligopoly
b.Cournotoligopoly
c.Stackelbergoligopoly
D.Bertrandoligopoly

Difficulty:Medium

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48.TheinversedemandinaCournotduopolyisP=ab(Q1+Q2),andcostsareC1(Q1)=
c1Q1andC2(Q2)=c2Q2.Thegovernmenthasimposedaperunittaxof$toneachunitsoldby
eachfirm.Theequilibriumoutputofeachfirmisthesameasasituationwhereeachfirm's:
a.Demandincreasesbyt
b.Demanddecreasesbyt
C.Marginalcostincreasesbyt
d.Marginalcostdecreasesbyt

Difficulty:Hard

49.TheinversedemandinaCournotduopolyisP=ab(Q1+Q2),andcostsareC1(Q1)=
c1Q1andC2(Q2)=c2Q2.TheGovernmenthasimposedaperunittaxof$toneachunitsoldby
eachfirm.Thetaxrevenueis:
a.Ttimesthetotaloutputofthetwofirmsshouldtherebenosalestax
B.Lessthanttimesthetotaloutputofthetwofirmsshouldtherebenosalestax
c.Greaterthanttimesthetotaloutputofthetwofirmsshouldtherebenosalestax
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

50.Theproducer'ssurplusofallfirmsinanoligopolyisusuallytheleastinthecaseofa:
a.Sweezyoligopoly
b.Cournotoligopoly
c.Stackelbergoligopoly
D.Bertrandoligopoly

Difficulty:Easy

51.TheBertrandtheoryofoligopolyassumes
A.Firmssetprices
b.Rivalswillincreasetheiroutputwheneverafirmincreasesitsoutput
c.Rivalswilldecreaseoutputwheneverafirmdecreasesitsoutput
d.Rivalswillfollowthelearningcurve

Difficulty:Easy

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52.Whichofthefollowingistrue?
a.InBertrandoligopolyeachfirmreactsoptimallytopricechanges
b.InCournotoligopolyfirmsengageinquantitycompetition
c.InSweezyoligopolyachangeinmarginalcostmaynothaveaneffectonoutputorprice
D.Allofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

53.InaCournotoligopoly,adecreaseinafirm'smarginalcostleadsto
a.Reducedoutputandahigherprice
b.Reducedoutputandalowerprice
c.Higheroutputandahigherprice
D.Higheroutputandalowerprice

Difficulty:Easy

54.TheSweezymodelofoligopolyrevealsthat
a.Capacityconstraintsarenotimportantindeterminingmarketperformance
b.Perfectlycompetitivepricescanariseinmarketswithonlyafewfirms
C.Changesinmarginalcostmaynotaffectprices
d.Allofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Easy

55.Whichofthefollowingisnotaquantitysettingoligopolymodel?
a.Stackelberg
b.Cournot
C.Bertrand
d.Alloftheabovearequantitysettingmodels

Difficulty:Easy

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56.Inthepresenceoflargesunkcosts,whichofthefollowingmarketstructuresgenerally
leadstothehighestprice?
a.Stackelberg
b.Cournot
c.Bertrand
D.Monopoly

Difficulty:Easy

57.BothfirmsinaCournotduopolywouldexperiencelowerprofitsif
A.Therewasanincreaseinmarginalproductioncosts
b.EachfirmsimultaneouslyincreasedoutputabovetheNashequilibriumlevel
c.OnefirmreducedoutputbelowtheCournotNashequilibriumlevel,whiletheotherfirm
continuedtoproduceitsCournotNashequilibriumoutput
d.Therewasanincreaseinmarginalproductioncostsandnefirmreducedoutputbelowthe
CournotNashequilibriumlevel,whiletheotherfirmcontinuedtoproduceitsCournotNash
equilibriumoutput

Difficulty:Hard

58.Whichofthefollowingisafeatureofacontestablemarket?
a.Thereareseveralfirmsinthemarketservingmanyconsumers
b.Thereisasinglefirminthemarketservingmanyconsumers
c.Themarketpriceisequaltomarginalcost
D.Thereisasinglefirminthemarketservingmanyconsumersandthemarketpriceisequal
tomarginalcost

Difficulty:Medium

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59.Whichofthefollowingistrueofaperfectlycontestablemarket?
A.P=MC
b.P>MC
c.P<ATC
d.P>MCandP<ATC

Difficulty:Medium

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60.AnewfirmentersamarketwhichisinitiallyservicedbyaCournotduopolycharginga
priceof$20.Whatwillthenewmarketpricebeshouldthethreefirmscoexistafterthe
entry?
a.$20
B.Below$20
c.Above$20
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Hard

61."Anoligopolyisanoligopoly.Firmsbehavethesamenomatterwhattypeofoligopolyit
is."Thisstatementistrueof:
a.BertrandandCournotoligopolies
b.CournotandStackelbergoligopolies
c.BertrandandStackelbergoligopolies
D.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

62.SueandJaneowntwolocalgasstations.Theyhaveidenticalconstantmarginalcosts,but
earnzeroeconomicprofits.SueandJaneconstitute
a.ASweezyoligopoly
b.ACournotoligopoly
C.ABertrandoligopoly
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

63.TheprofitsoftheleaderinaStackelbergduopoly
A.Aregreaterthanthoseofthefollower
b.Equalthoseofthefollower
c.Arelessthanthoseofthefollower
d.AregreaterthanthoseofaSweezyoligopolist

Difficulty:Hard

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64.Animportantconditionforacontestablemarketis:
a.Allproducershavedifferenttechnologies
b.Therearehightransactioncosts
C.Existingfirmscannotrespondquicklytoentrybyloweringtheirprice
d.Therearesunkcosts

Difficulty:Easy

65.TheCournottheoryofoligopolyisbasedontheassumptionthateachfirmbelievesthat
rivalswill
A.Keeptheiroutputconstantifitchangesitsoutput
b.Increasetheiroutputwheneveritincreasesitsoutput
c.Decreasetheiroutputwheneveritincreasesitsoutput
d.Randomlychangeoutputwheneveritchangesitsoutput

Difficulty:Easy

66.Whichofthefollowingistrue?
a.InBertrandoligopolymarketseachfirmbelievesthattheirrivalswillholdtheiroutput
constantifitchangesitsoutput
b.InCournotoligopolymarketfirmsproduceanidenticalproductataconstantmarginalcost
andengageinpricecompetition
C.InSweezyoligopolymarketseachfirmbelievesrivalswillcuttheirpricesinresponsetoa
pricereduction,butwillnotraisepricesinresponsetopriceincreases
d.Inoligopolymarketachangeinmarginalcostneverhasanaffectonoutputorprice

Difficulty:Medium

67.Whichofthefollowingarenotpricesettingoligopolymodels?
a.Stackelberg
b.Cournot
c.Bertrand
D.StackelbergandCournot

Difficulty:Easy

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68.AnewfirmentersamarketwhichisinitiallyservicedbyaBertrandduopolycharginga
priceof$30.Assumingthatthenewfirmisequallyasefficientastheincumbentfirms,what
willthenewpricebeshouldthethreefirmscoexistaftertheentry?
a.Above$30
b.Below$30
C.Equalto$30
d.Unabletotellgiventheinformationprovided

Difficulty:Easy

69.Oneofthecharacteristicsofacontestablemarketisthat
a.Allfirmshavedifferentproductivetechnology
B.Consumersreactquicklytoapricechange
c.Existingfirmsrespondquicklytoentrybyloweringtheirprice
d.Therearesunkcosts

Difficulty:Easy

70.FirmAhasahighermarginalcostthanfirmB.Theycompeteinahomogeneousproduct
Cournotduopoly.Whichofthefollowingresultswillnotoccur?
A.QA>QB
b.ProfitA<ProfitB
c.RevenueoffirmA<RevenueoffirmB
d.PriceA=PriceB

Difficulty:Easy

71.ThemarketdemandinaBertrandduopolyisP=154Q,andthemarginalcostsare$3.
Fixedcostsarezeroforbothfirms.Whichofthefollowingstatement(s)is/aretrue?
A.P=$3
b.P=$10
c.P=$15
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Easy

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72.TwoidenticalfirmscompeteasaCournotduopoly.Theinversemarketdemandtheyface
isP=804Q.ThecostfunctionforeachfirmisC(Q)=8Q.Thepricechargedinthismarket
willbe
a.$12
B.$32
c.$48
d.$56

Difficulty:Medium

73.TwofirmscompeteasaStackelbergduopoly.TheinversemarketdemandtheyfaceisP=
624.5Q.ThecostfunctionforeachfirmisC(Q)=8Q.Theoutputsofthetwofirmsare:
a.QL=48;QF=24
b.QL=35;QF=6
C.QL=6;QF=3
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Medium

74.WhichofthefollowingisnotafeatureofSweezyoligopoly?
a.Thereareafewfirmsinthemarketservingmanyconsumers
b.Thefirmsproducedifferentiatedproducts
c.Eachfirmbelievesthatrivalswillcuttheirpricesinresponsetoapricereduction,butwill
notraisetheirpricesinresponsetoapriceincrease
D.Freeentryandexitoccursinthemarket

Difficulty:Easy

75.TheprofitsofthefollowerinaStackelbergduopoly
a.Aregreaterthanthoseoftheleader
b.Equalthoseoftheleader
C.Arelessthanthoseoftheleader
d.Allthestatementsassociatedwiththisquestionarecorrect

Difficulty:Easy

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76.IffirmsareinCournotequilibrium,theycouldincreaseprofitsby
a.Jointlyincreasingoutput
B.Jointlyreducingoutput
c.Unilaterallyincreasingprices
d.Unilaterallyreducingprices

Difficulty:Easy

77.SupposethattheduopolistscompetinginCournotfashionagreetoproducethecollusive
output.Giventhatfirmonecommitstothiscollusiveoutput,itpaysfirmtwoto
A.Cheatbyproducingmoreoutput
b.Cheatbyproducinglessoutput
c.Cheatbyraisingprices
d.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Hard

78.Therearemanydifferentmodelsofoligopolybecause:
a.Beliefsarenotincorporatedinoligopolisticcompetition
b.Firmsdonotmaximizeprofitsinoligopolisticcompetition
C.Oligopolyisthemostcomplicatedtypeofmarketstructure
d.Bothaandc

Difficulty:Easy

79.ConsideraCournotduopolywiththefollowinginversedemandfunction:P=1002Q1
2Q2.Thefirms'marginalcostareidenticalandgivenbyMCi(Qi)=2Qi.Basedonthis
informationfirm1and2'smarginalrevenuefunctionsare
a.MR1(Q1,Q2)=1002Q1Q2andMR2(Q1,Q2)=100Q12Q2
B.MR1(Q1,Q2)=1004Q12Q2andMR2(Q1,Q2)=1002Q14Q2
c.MR1(Q1,Q2)=1002Q14Q2andMR2(Q1,Q2)=1004Q12Q2
d.MR1(Q1,Q2)=24.50.5Q2andMR2(Q1,Q2)=24.50.5Q1

Difficulty:Medium

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80.ConsideraCournotduopolywiththefollowinginversedemandfunction:P=1002Q1
2Q2.Thefirms'marginalcostareidenticalandgivenbyMCi(Qi)=2Qi.Basedonthis
informationfirm1and2'sreactionfunctionsare
a.r1(Q2)=24.50.5Q1andr2(Q1)=24.50.5Q2
B.r1(Q2)=24.50.5Q2andr1(Q2)=24.50.5Q1
c.Q1=490.5Q2andQ2=490.5Q1
d.Q1=490.25Q2andQ2=490.25Q1

Difficulty:Medium

81.ConsideraCournotduopolywiththefollowinginversedemandfunction:P=1002Q1
2Q2.Thefirms'marginalcostareidenticalandgivenbyMCi(Qi)=2Qi.Basedonthis
informationconsumersurplusinthismarketis
a.$16.33
b.$32.67
c.$1,067.11
D.$2,134.22

Difficulty:Hard

82.ConsideraStackelbergduopolywiththefollowinginversedemandfunction:P=100
2Q12Q2.Thefirms'marginalcostareidenticalandgivenbyMCi(Qi)=2Qi.Basedonthis
informationtheStackelbergleader'smarginalrevenuefunctionis
a.MR(QL)=502QL+c1
B.MR(QL)=502QL+c2
c.MR(QF)=1002QF+c1
d.MR(QF)=100QF+c2

Difficulty:Hard

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Chapter 09 - Basic Oligopoly Models

83.ConsideraStackelbergduopolywiththefollowinginversedemandfunction:P=100
2Q12Q2.Thefirms'marginalcostareidenticalandgivenbyMCi(Qi)=2Qi.Basedonthis
informationtheStackelbergfollower'smarginalrevenuefunctionis
A.MRF(QL,QF)=1002QL4QF
b.MRF(QL,QF)=1004QL2QF
c.MRF(QL,QF)=1002QLQF
d.MRF(QL,QF)=100QL2QF

Difficulty:Medium

84.ConsideraStackelbergduopolywiththefollowinginversedemandfunction:P=100
2Q12Q2.Thefirms'marginalcostareidenticalandgivenbyMCi(Qi)=2Qi.Basedonthis
informationtheStackelbergfollower'sreactionfunctionis
a.QF=24.50.25QL
b.QF=490.25QF
C.QF=24.50.5QL
d.QF=24.5QL

Difficulty:Medium

85.ConsideraStackelbergduopolywiththefollowinginversedemandfunction:P=100
2Q12Q2.Thefirms'marginalcostareidenticalandgivenbyMCi(Qi)=2Qi.Basedonthis
informationtheStackelbergleader'sreactionfunctionis
a.QL=24.50.5QF
b.QL=500.5QF
c.QL=490.5QF
D.Noneofthestatementsassociatedwiththisquestionarecorrect

Difficulty:Easy

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Chapter 09 - Basic Oligopoly Models

86.ConsideraStackelbergduopolywiththefollowinginversedemandfunction:P=100
2Q12Q2.Thefirms'marginalcostareidenticalandgivenbyMCi(Qi)=2Qi.Basedonthis
informationtheconsumersurplusinthismarketis
a.$36.75
b.$73.50
C.$1,352.40
d.$2,704.80

Difficulty:Hard

87.Considertwofirmscompetingtosellahomogeneousproductbysettingprice.Theinverse
demandcurveisgivenbyP=6Q.Ifeachfirms'costfunctionisCi(Qi)=6+2Qi,theneach
firmwillsymmetricallyproduceunitsofoutputandearn.
a.4units;profitsof$6
b.2units;profitsof$2
c.4units;lossesof$2
D.2units;lossesof$6

Difficulty:Medium

88.Considertwofirmscompetingtosellahomogeneousproductbysettingprice.Theinverse
demandcurveisgivenbyP=6Q.Ifeachfirms'costfunctionisCi(Qi)=2Qi,thenconsumer
surplusinthismarketis
a.$2
b.$4
C.$8
d.Thereisinsufficientinformationtodetermineconsumersurplusinthismarket

Difficulty:Medium

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Chapter 09 - Basic Oligopoly Models

89.Considertwofirmscompetingtosellahomogeneousproductbysettingprice.Theinverse
demandcurveisgivenbyP=15Q.Firm1hasMC1(Q1)=1andfirm2hasMC2(Q2)=1.05.
Basedonthisinformationwecanconcludethatthemarketpricewillbe
a.$1andeachfirmwillproduce7units
b.$1.05andeachfirmwillproduce6.975units
C.$1.04andfirm1willproduce13.96unitsandfirm2willproduce0units
d.$1andfirm1willproduce14unitsandfirm2willproduce0units

Difficulty:Hard

90.Anincreaseinfirm2'smarginalcostwillcause
a.Adownwardshiftinfirm1'sreactionfunctionresultinginanewCournotequilibrium
wherefirm1isproducingalowerquantityandfirm2isproducingahigherquantity
b.Anupwardshiftinfirm1'sreactionfunctionresultinginanewCournotequilibriumwhere
firm1isproducingahigherquantityandfirm2isproducingalowerquantity
C.Adownwardshiftisfirm2'sreactionfunctionresultinginanewCournotequilibrium
wherefirm1isproducingahigherquantityandfirm2isproducingalowerquantity
d.Anupwardshiftinfirm2'sreactionfunctionresultinginanewCournotequilibriumwhere
firm1isproducingalowerquantityandfirm2isproducingahigherquantity

Difficulty:Hard

91.Adecreaseinfirm1'smarginalcostwillcause
a.Adownwardshiftinfirm1'sreactionfunctionresultinginanewCournotequilibrium
wherefirm1isproducingalowerquantityandfirm2isproducingahigherquantity
B.Anupwardshiftinfirm1'sreactionfunctionresultinginanewCournotequilibriumwhere
firm1isproducingahigherquantityandfirm2isproducingalowerquantity
c.Adownwardshiftisfirm2'sreactionfunctionresultinginanewCournotequilibrium
wherefirm1isproducingahigherquantityandfirm2isproducingalowerquantity
d.Anupwardshiftinfirm2'sreactionfunctionresultinginanewCournotequilibriumwhere
firm1isproducingalowerquantityandfirm2isproducingahigherquantity

Difficulty:Hard

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Chapter 09 - Basic Oligopoly Models

92.ConsideramarketconsistingoftwofirmswheretheinversedemandcurveisgivenbyP=
5002Q12Q2.Eachfirmhasamarginalcostof$50.Basedonthisinformationwecan
concludethatconsumersurplusinthedifferentequilibriumoligopolymodelswillfollow
whichofthefollowingorderings.
a.CSCollusion>CSStackelberg>CSCournot>CSBertrand
B.CSBertrand>CSStackelberg>CSCournot>CSCollusion
c.CSBertrand>CSCournot>CSStackelberg>CSCollusion
d.CSStackelberg>CSBertrand>CSCournot>CSCollusion

Difficulty:Medium

93.ConsideramarketconsistingoftwofirmswheretheinversedemandcurveisgivenbyP=
5002Q12Q2.Eachfirmhasamarginalcostof$50.Basedonthisinformationwecan
concludethataggregatequantityinthedifferentequilibriumoligopolymodelswillfollow
whichofthefollowingorderings.
a.QCollusion<QStackelberg<QCournot<QBertrand
B.QCollusion<QCournot<QStackelberg<QBertrand
c.QBertrand<QCollusion<QCournot<QStackelberg
d.QBertrand<QStackelberg<QCournot<QCollusion

Difficulty:Medium

94.ConsideramarketconsistingoftwofirmswheretheinversedemandcurveisgivenbyP=
5002Q12Q2.Eachfirmhasamarginalcostof$50.Basedonthisinformationwecan
concludethatequilibriumpriceinthedifferentoligopolymodelswillfollowwhichofthe
followingorderings.
A.PBertrand<PStackelberg<PCournot<PCollusion
b.PStackelberg<PCollusion<PCournot<PBertrand
c.PCollusion<PCournot<PStackelberg<PBertrand
d.PBertrand<PCournot<PStackelberg<PCollusion

Difficulty:Easy

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Chapter 09 - Basic Oligopoly Models

95.ConsideramarketconsistingoftwofirmswheretheinversedemandcurveisgivenbyP=
5002Q12Q2.Eachfirmhasamarginalcostof$50.Basedonthisinformationwecan
concludethataggregateprofitsinthedifferentequilibriumoligopolymodelswillfollow
whichofthefollowingorderings.
a.Bertand>Collusion>Stackelberg>Cournot
B.Collusion>Cournot>Stackelberg>Bertand
c.Collusion>Stackelberg>Cournot>Bertand
d.Noneofthestatementsassociatedwithquestionarecorrect

Difficulty:Medium

EssayQuestions

96.InGelate,Pennsylvania,themarketforcompactdiscshasevolvedasfollows.Thereare
twofirmsthateachuseamarqueetopostthepricetheychargeforcompactdiscs.Eachfirm
buysCDsfromthesamesupplieratacostof$5.00perdisc.Theinversemarketdemandin
theirareaisgivenby
,whereQisthetotaloutputproducedbythetwofirms.
a.SolvefortheBertrandequilibriumpriceandmarketoutput.
b.Wouldyouranswerdifferiftheproductswerenotperfectsubstitutes?Explain.
a.P=MC=$5.Tofindindustryoutput,wefindQsuchthatP=5=102Q.SolvingforQ
givesusindustryoutputof2.5units.
b.Whengoodsareperfectsubstitutes,firmsareforcedtochargeapriceequaltomarginal
cost,otherwisetheysellnothing.However,ifconsumersviewthegoodsasheterogeneous
(differentiatedproducts)afirmdoesnotloosetheentiremarketifitpricesaboveanother
firm'sprice.

97.Supposeyouarethemanagerofamediumsizedfirmthatoperatesinanindustrythathas
afourfirmconcentrationratioof100percent.Allfirmsintheindustryareofequalsize.In
ordertodetermineyourfirm'soptimaloutputandprice,youmustobtaininformationabout
howrivalswouldrespondtochangesinyourdecisions.Ifyouwerethemanager,howwould
youobtainthisinformation?
Onemethodwouldbetostudythehistoryofhowrivalsrespondedtochangesinyourpast
pricingpolicies.

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Chapter 09 - Basic Oligopoly Models

98.Youarethemanagerofafirmoperatinginadifferentiatedproductoligopoly.Show
graphicallyyouroptimalresponsetoanincreaseinmarginalcostif
a.Youbelieverivalswillfollowpricereductionsbutnotpriceincreases.
b.Youbelieverivalswillholdoutputconstantifyoudecreaseoutput.
c.Youbelieverivalswillfollowpriceincreasesbutnotpricedecreases.

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Chapter 09 - Basic Oligopoly Models

a.Inthiscase,thedemandfunctionforaSweezyoligopolistisgivenbyABCinFigure93a,
andmarginalrevenuecurveisADEF.Solongasmarginalcostchangesbyasmallamount,
youroutputwillremainatQ.ForlargeincreasesinMC,theprofitmaximizinglevelofoutput
willfall.
Figure93a

b.Inthiscase,theinitialCournotequilibriumisgivenbypointAinFigure93b.Anincrease
infirmone'smarginalcostresultsinanewCournotequilibriumatpointB.Thus,themanager
offirmoneshouldreduceoutputtomaximizeprofits.
Figure93b

c.Inthiscase,thedemandcurveisABCinFigure93c,whileMRisADEF.Anincreasein
marginalcostfromMCtoMC*leadstoareductionintheprofitmaximizinglevelofoutput.
Figure93c

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Chapter 09 - Basic Oligopoly Models

99.The(inverse)demandinaCournotduopolyis
and

andcostare

.ShowthattheCournotequilibriumlevelsofoutputare
and

EquatingMR=MCforfirmoneyieldsab(Q1+Q2)bQ1=c1.Thisyieldsareaction
functionforfirmoneof

Similarly,equatingMR=MCforfirmtwoyieldsab(Q1+Q2)bQ2=c2,sotwo'sreaction
functionis

Solvingthesetwoequationssimultaneouslygivesusthedesiredresult.

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Chapter 09 - Basic Oligopoly Models

100.Themarketforwidgetsconsistsoftwofirmsthatproduceidenticalproducts.
Competitioninthemarketissuchthateachofthefirmsindependentlyproducesaquantityof
output,andthesequantitiesarethensoldinthemarketatapricethatisdeterminedbythe
totalamountproducedbythetwofirms.Firm2isknowntohaveacostadvantageoverFirm
1.Arecentstudyfoundthatthe(inverse)marketdemandcurvefacedbythetwofirmsis
andcostsare
and
a.Determinethemarginalrevenueforeachfirm.
b.Determinethereactionfunctionforeachfirm.
c.Howmuchoutputwilleachfirmproduceinequilibrium?
d.Whataretheequilibriumprofitsforeachfirm?

a.MR1=2802Q24Q1andMR2=2802Q14Q2.
b.FirmonewillproducesuchthatMR1=MC1,or2802Q24Q1=3.Thus,thereaction
functionoffirmoneisr1(Q2)=69.25.5Q2.FirmtwowillproducesuchthatMR2=MC2,or
2802Q1+4Q2=2.Thereactionfunctionforfirmtwoisthusr2(Q1)=69.5.5Q1.
c.SolvingQ1andQ2fromthetworeactionfunctions,wehave

d.1=95(46)3(46)=$4,232;2=95(46.5)2(46.5)=$4,324.5.

101.WhenMCIannouncedapricediscountplandesignedtoinducesmallfirmstouseits
services,thepriceofitsstockimmediatelydeclined.Whydoyouthinkthestockmarket
reactednegativelytoMCI'splantoattractnewcustomers?
ThemostlikelyreasonthemarketdidnotrespondfavorablytoMCI'splanisthatinvestors
recognizedthemarketforlongdistanceservicesisoligopolistic;competitorslikeAT&T
wouldlikelyreacttoMCI'splanbychangingtheirownpricingstructure.Infact,thisis
preciselywhatdidhappen;6daysaftertheMCIannouncement,AT&Tfollowedwitha
similarplan.Effectively,MCI'sactioninitiateda"pricewar"thatparallelsouranalysisof
Bertrandcompetition.

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Chapter 09 - Basic Oligopoly Models

102.TheinversedemandcurveforaStackelbergduopolyis

.Theleader's

coststructureis
.Thefollower'scoststructureis
.
a.Determinethereactionfunctionforthefollower.
b.Determinetheequilibriumoutputlevelsforboththeleaderandthefollower.
c.Whataretheprofitsfortheleader?Forthefollower?
a.Thefollower'sreactionfunctionisQF=831.25.5QL.
b.Theleader'soutputis

Similarly,QF=831.25.5(832.9)=414.8units.Thus,thepriceofoutputisgivenbyP=
10,0006(832.9+414.8)=$2,513.8.
c.L=2513.8(832.9)15(832.9)=$2,081,250.5;F=$1,032,354.2.

103.WhatrealworldevidencewouldleadyoutobelievethatfirmswereactingasCournot
oligopolists?Stackelbergoligopolists?Bertrandoligopolists?
EvidenceofCournotoligopolywouldbeasituationwherefirmsmakequantitysetting
decisions.EvidenceofStackelbergbehaviorincludesonefirmsettingoutputpriortoother
firmsinthemarket,whotaketheleader'soutputasgiven.EvidenceofBertrandoligopoly
wouldbeseverepricecompetition,withlowpricesandprofits.

104.ZeldaIndustriesistheonlyfirmofitskindintheworld.Duelargelytohistorical
accident,itbeganproducingstreganomasin1985inavacantwarehouse.Virtuallyanyone
withadegreeincollegechemistrycouldeasilyreplicatethefirm'sformula,whichisnot
patentprotected.Nonetheless,since1985Zeldahasaveragedaccountingprofitsof6percent
oninvestment.Thisrateiscomparabletotheaverageinterestratethatlargebankspaidon
depositsovertheperiod.DoyouthinkZeldaisearningmonopolyprofits?Why?
No.Infact,Zeldacouldhaveinvestedfundsovertheperiodat6percent.Itsaccounting
profitsof6percenttranslateintozeroeconomicprofits.Mostlikely,Zeldaoperatesina
contestablemarket,andisdisciplinedbythethreatofentrybyotherfirms.Therefore,Zelda
cannotchargepricesinexcessofmarginalcost.

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Chapter 09 - Basic Oligopoly Models

105.Youarethemanagerofafirminanewindustry.Youhavegottenthejumpontheonly
otherproducerinthemarket.Youknowwhatyourcompetitor'scostfunctionis,anditknows
yours.Yourproducts,althoughdifferenttoexperts,areindistinguishabletotheaverage
consumer.Yourmarketingresearchteamhasprovidedyouwiththefollowingmarketdemand
curve:

.Yourcostfunctionis

.Yourcompetitor'scostfunction

is
.Yourdiligenteffortwillallowyoutodecidehowmuchofyourproductto
provideandallowyoutoplaceitonthemarketshortlybeforeyourcompetitorwillbeableto
makeitsproductavailableforsale.Whatoutputlevelwillyouchoose,andwhatpricewill
youcharge?Explain.
YouareclearlyaStackelbergleader,andshouldsettheStackelbergoutputtomaximizeyour
profits.Tousetheformulasinthetext,youfirstneedtoconvertthegivendemandequation
(Q=1250.5P)intothecorrespondinginversedemandfunction.Todothis,solvethegiven
demandequationforPtogetP=25002Q.Basedonthisinversedemandfunction,usethe
formulainthetexttosolveforyourStackelbergoutputastheleader.Thisisgivenbythe
formulaQA=(a+cB2cA)/2b=(2500+62(8))/4=622.5units.Thefollowerwillproduce
QB=(acB)/2b.5QA=[25006]/4.5(622.5)=312.25units.Thus,thepriceofoutputwill
beP=25002(622.5+312.25)=$630.50.

106.Youareapotentialentrantintoamarketthatpreviouslyhashadentryblockedbythe
government.Yourmarketresearchhasestimatedthattheinversemarketdemandcurvefor
thisindustryis

,where

.Youestimatethatifyouenterthe

market,yourowncostfunctionwillbe
.Thegovernmenthasinvitedyour
firmtoentertheindustry,butitwillrequireyoutopayaonetimelicensefeeof$100,000.
Youdonotknowthecostfunctionsofthefirmspresentlyinthemarket;however,thepriceis
now$16,000.Lastyear87unitsweresoldbyexistingfirms.Wouldyouchoosetoenterthis
market?Explain.
Inthiscase,yourinversedemandfunctionremainsatP=22,50075(87)75Qy=15,975
75Qy.EquatingMR=MCyields15,975150Qy=15,300.SolvingforQyyieldstheprofit
maximizingoutputbytheentrant,assumingexistingfirmsholdoutputconstant:Qy=4.5
units.ThecorrespondingpriceisP=22,50075(87+4.5)=$15,637.5.Profitsifyouenter
(netofthelicensefee)are$15,637.5(4.5)15,300(4.5)100,000=$98,481.25.Thus,it
wouldnotpaytoentertheindustryifyouexpectrivalstomaintaintheirpresentoutput.

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107.CompareandcontrasttheoutputlevelsandprofitsfortheCournot,Stackelberg,and
Bertrandmodels.Usethefollowingcostanddemandconditionsforyourcomparison,and
supposetherearetwofirms:
costsofzero.

.Eachfirmhasamarginalcostof$20andfixed

108.Overthepast20years,the12membersoftheOrganizationofPetroleumandExporting
Countrieshavemaderepeatedattemptstorestrictoutputinordertomaintainhighcrudeoil
prices.Between1990and1995,however,crudeoilpriceshavedroppedbyabout20percent,
dueinparttoincreasedproductionfromtheformerSovietUnion,LatinAmerica,Asia,and
theNorthSea.InlightoftheseincreasesinoilproductionfromnonOPECcountries,what
mustOPECdotomaintainthepriceofoilatitsdesiredlevel?Doyouthinkthiswillbeeasy
forOPECtodo?Explain.
OPECmustdecreaseitstotalquantityofoilproducedbytheamountthatnonOPEC
countriesincreasetheiroilproduction.ThiswillbedifficultforOPECtodo.Asdemandand
costconditionschange,oldcollusiveagreementsnolongsuitthenewenvironment.
Moreover,evenintheabsenceofchangingdemandorcostconditions,eachfirmhasan
incentivetocheatoncollusiveagreements,asshowninthetext.

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Chapter 09 - Basic Oligopoly Models

109.Inthelate1990s,Chryslerannouncedanewincentiveprogramonitsminivansthat
includedsubsidizedinterestratesandcashallowances.Undertheplan,consumerscould
enjoyfinancingratesaslowas4.9percent,aswellasa$500cashallowancetowardthelease
orpurchaseofanewminivan.Whatchangesinsaleswouldyouanticipateifyouwerethe
managerofaDodge/Plymouthfranchise?Why?
Otherthingsequal,yoursaleswouldrise.However,giventheoligopolisticnatureofthe
industry,youshouldanticipatethatautomakerslikeGeneralMotorsandFordwilllikely
counterwithsimilarincentiveprograms,whichwillmitigatetosomeextentthesalesincrease
youotherwisewouldhaveenjoyed.

110.OrionandZedaaretheonlyproducersofauniqueproductthatsoldinamarketwhere
theinversedemandcurveis
.Thefirmsproduceidenticalproductsandhave
identicalcostfunctionsgivenby
.Themanagersofeachfirmmustdecideon
theiroutputsonMondaymorningandthenbringproductstomarketbynoon.
a.Whatiseachfirm'smarginalrevenue?Marginalcost?
b.Equateeachfirm'smarginalrevenuetomarginalcost.
c.Useyourresultinpart(b)tosolveforeachfirm'sreactionfunction.
d.Useyourresultsinpart(c)tosolvefortheCournotequilibriumlevelsofoutputforeach
firm.
a.MRO=2004qo2qz;MRz=2002qo4qz;MCO=MCz=4.
b.MRO=MCO2004qo2qz=4;MRz=MCz2002qo4qz=4.
c.
and
d.Substitutingqzintoqofrompart(c)yieldsanequilibriumoutputforOrionof32.7units.
Likewise,substitutingqointoqzfrompart(c),equilibriumoutputforZedais32.7units.

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Chapter 09 - Basic Oligopoly Models

111.YouaretheCEOofClipIt,apaperclipmanufacturer.Yourcompanyenjoysapatented
technologythatallowsittoproducepaperclipsfasterandatalowercostthanyouronlyrival,
FastenIt.Clipitusesthisadvantagetobethefirsttochooseitsprofitmaximizingoutputlevel
inthemarket.Theinversedemandfunctionforpaperclipsis
,ClipIt'scostsare
,andFastenIt'scostsare
.
a.WhatisClipIt'sprofitmaximizingoutputlevel?FastenIt's?
b.Whatisthemarket'sequilibriumprice?
c.Howmuchprofitdoeseachfirmearn?
d.Ignoringantitrustconsiderations,woulditbeprofitableforyourfirmtomergewith
FastenIt?Ifnot,explainwhynot;ifso,puttogetheranofferthatwouldpermityouto
profitablycompletethemerger.
a.Stackelbergleader'sprofitmaximizingquantityis125units;Stackelbergfollower'sprofit
maximizingquantityis61.5units.
b.P=$127.00.
c.
d.AssumingthatthemergedfirmsadoptedClipIt'spatentedtechnologythatallowsitto
produceatalowercostofCC(QC)=2QC,amergerwouldbeprofitable.Profitsofthemerged
firmwouldbe$30,000.50comparedtojoint(industry)profitsof$23,189.50whenfirms
competeinaStackelbergsetting.

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