Practice Questions on Oligopoly and Joint Product Pricing

1. The market demand and cost functions for the two firms under oligopoly are:
P = 100 – 0.5Q where Q = Q1+Q2
TC1 = 5Q1
& TC2 = 0.5 Q22
If the firms operate under cartels aiming at joint profit maximization, determine output produced
by each firm, common price and joint profit.

2. Given the market demand function D = 50 - 0.3P; Cost function of dominant firm C = 2X and
the supply function of small firms S = 0.2P, find the price set by the dominant firm and the
output supplied by the dominant firm as well as the supply of small firms.

3. The Aluminum Industry in the oligopoly market is operating under the price leader follower
model with
Marginal cost of leader firm = 0.1Q
Marginal cost of follower firm = 0.25 Q
The market demand function of aluminum is P = 100 – Q
a. Find the profit maximizing output for the leader.
b. Find the product price
c. Find the quantity of output the followers would produce.

4. The demand function for price increases and price cuts for an oligopolist are respectively Q 1=
210 - 30P1 and, Q2 = 90 - 10P2. The Total Cost (TC) function of the oligopolist is given by
TC = 3.5Q +
(i) Derive the MR1 and MR2 as well as MC functions facing the oligopolist.
(ii) Determine price and output at the kink on the demand curve.
(iii) Determine the upper and the lower limits of the MR gap. Prove that MC falls in MR gap.
(iv) Find the value of total profit of the oligopolist.

5. The demand functions for price increases and for price cuts for an oligopolist are respectively
Q1 = 280 - 40P1 and Q2 = 100 - 10P2.
The total cost function is given by TC = 2Q + 0.025 Q2.
i. Derive the MR1, MR2 and MC functions facing the oligopolist.
ii. Derive price and output at the kink on the demand curve.
iii. Determine the upper and lower limits of the MR gap and prove that MC falls in the MR
gap.
iv. Find the value of total profit.

6. The market demand function is D = 100 – 5P and the supply of small firms is S = 10 + P.
The marginal cost of the dominant firm is MC = 2X. Find the price set by the dominant firm.
Also calculate the output to be produced by the dominant firm and the small firms.

7. Suppose Modern Apparel industry produces pant and shirt jointly in equal quantity. The total
cost function of the industry is:
TC = 100 + Q + 4Q2
Where Q is the number of units of output. Each unit consists of one unit of pant (P) and one
unit of shirt (S). The demand functions of two products are:
Practice Questions on Oligopoly and Joint Product Pricing
Pp = 150 – Qp
Ps = 100 – 2Qs
Where Pp and Qs are the price and output of pant and P s and Qs are the price and output of
shirt. How much should the industry produce of pant and shirt per period and how much
price of each should be set up?
8. Himalayan Brewery sells San Miguel and Tiger beer. The two goods are assumed to be
jointly produced in fixed proportions. The marginal cost equation for the Tiger-San Miguel
product package is given by:
MC = 30 + 5Q
The demand and marginal revenue equations for the two products are:
Tiger San Miguel
P = 60 - Q P = 80 - 2Q
MR = 60 - 2Q MR = 80 - 4Q
What prices should be charged for Tiger and San Miguel? How many bottles of the products should be
produced?

9. Suppose that Gauri Shankar Dairy Limited produces goods A and B jointly in equal quantity.
The total cost function of dairy is,
TC = 100 + Q + 2Q2
Where Q is the number of units of output, each unit contains 1 unit of A and 1 unit of B. The
demand functions of two goods are PA = 200 – QA and PB = 150 – 2QB, where PA, QA and PB,
QB are prices and quantities of A and B respectively. What quantities of A and B should be
produced and what price should be charged on each good?