Oligopoly

0 -1000 -1000 0 The following graph shows a firm with a kinked demand curve. a. What assumption lies behind the shape of this demand curve? b. Identify the firm’s profit-maximizing output and price. c. Use the graph to explain why the firm’s price is likely to remain the same, even if marginal costs change. Some games of strategy are cooperative. One example is deciding which side of the road to drive on. It doesn’t matter which side it is, as long as everyone chooses the same side. Otherwise, everyone may get hurt. Driver 2 Driver 1 Left Right ,-1000 a. Does either player have a dominant strategy? b. Is there a Nash equilibrium in this game? Explain. c. Why is this called a cooperative game? A monopolist has a constant marginal and average cost of $10 and faces a demand curve of QD = 1000 – 10P. Marginal revenue is given by MR = 100 – 1/5Q. a. Calculate the monopolist’s profit-maximizing quantity, price, and profit. b. Now suppose that the monopolist fears entry, but thinks that other firms could produce the product at a cost of $15 per unit (constant marginal and average cost) and that many firms could potentially enter. How could the monopolist attempt to deter entry, and what would the monopolist’s quantity and profit be now? c. Should the monopolist try to deter entry by setting a limit price? Suppose a firm has a constant marginal cost of $10. The current price of the product is $25, and at that price, it is estimated that the price elasticity of demand is -3.0. a. Is the firm charging the optimal price for the product? Demonstrate how you know. b. Should the price be changed? If so, how? A monopolist sells in two geographically divided markets, the East and the West. Marginal cost is constant at $50 in both markets. Demand and marginal revenue in each market are as follows: QE = 900 – 2PE MRE = 450 – QE QW = 700 – PW MRW = 700 – 2QW a. Find the profit-maximizing price and quantity in each market. b. In which market is demand more elastic? MC D MR Q P

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