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10
Market Structure:
Duopoly and Oligopoly
OVERVIEW
10.22 Consider Figure 1. If the marginal cost curve shifts from MC2 to
MC4, there will be:
A. A decrease in price and an increase in output.
B. A decrease in price and no change in output.
C. No change in price and an increase in output.
D. No change in price or output.
10.25 Other things being equal, the Cournot duopoly model suggests that
profit-maximizing firms in an oligopolistic industry:
I. Charge a higher price than monopolies.
II. Charge a higher price than perfectly-competitive firms.
III. Charge a lower price than monopolies.
IV. Charge a lower price than perfectly-competitive firms.
Which of the following is correct?
A. I only.
B. II only.
C. I and II only.
D. II and III only.
E. I and IV only.
A. The first firm to enter the industry will charge a higher price
than the second firm.
B. The first firm to enter the industry will charge a lower price
than the second firm.
C. Both firms will end up charging the same price.
D. The first firm to enter the industry will earn higher profits than
the second firm.
E. The first firm to enter the industry will earn lower profits than
the second firm.
Firm 2
SHORTER PROBLEMS
10.2 Suppose that a duopolistic firm faces the following kinked demand
for its product:
Q1 = 50 - 0.5P
Q2 = 90 - P
where Q represents units of output and P the price of the product.
A. What are the price and quantity demanded at the kink?
B. Between what values may marginal cost vary without causing a
change in the equilibrium price and quantity?
D. Diagram your answer.
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10.5 Suppose that the demand equations for the products of two profit-
maximizing firms in a duopolistic industry are:
Q1 = 250 - 5P1 + 2P2
Q2 = 250 - 5P2 + 2P1
Suppose, further, that the firms total cost functions are
TC1 = 25 + 5Q1
TC2 = 25 + 5Q2
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10.6 Suppose that the demand equations for the products of two profit-
maximizing firms in a duopolistic industry are:
Q1 = 250 - 5P1 + 2P2
Q2 = 250 - 5P2 + 2P1
Suppose, further, that the firms total cost functions are
TC1 = 25 + 5Q1
TC2 = 10 + 2Q2
where P1 and P2 are the prices charged by each firm producing Q1
and Q2 units of output.
A. What is the equilibrium price charged by both firms?
B. What is the equilibrium quantity of each firm?
C. What are the profits of each firm?
LONGER PROBLEMS
TC = 120 + 40Q
Will this alter the firms profit-maximizing price and output
level? Calculate the maximum profit for this firm.
F. Suppose that the firms total cost of production were to
increase to:
TC = 140 + 50Q
Will this alter the firms profit-maximizing price and output
level? Calculate the maximum profit for this firm.
Nonox
Intersection Interstate
Firm B
Radio Newspapers
10.1 D. 10.21 B.
10.2 A. 10.22 D.
10.3 D. 10.23 C.
10.4 C. 10.24 A.
10.5 D. 10.25 D.
10.6 B. 10.26 A.
10.7 A. 10.27 C.
10.8 E. 10.28 D.
10.9 C. 10.29 A.
10.10 A. 10.30 B.
10.11 E. 10.31 C.
10.12 C. 10.32 D.
10.13 D. 10.33 C.
10.14 B. 10.34 A.
10.15 B. 10.35 C.
10.16 A. 10.36 D.
10.17 E. 10.37 D.
10.18 A. 10.38 C.
10.19 B. 10.39 D.
10.20 B. 10.40 B.
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10.2 A. The price and output level may be determined by equating the
demand equations for this product of this firm at the kink, i.e.,
50 - 0.5P = 80 - P
P* = $80
Q* = 50 - 0.5(80) = 90 - (80) = 10 units
B. P = 100 - 2Q
TR1 = 100Q - 2Q2
MR1 = 100 - 4Q for Q 10
P = 90 - Q
TR2 = 90Q - Q2
MR2 = 90 - 2Q for Q 10
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10.1 A. The price and output level may be determined by equating the
demand equations for this product of this firm at the kink, i.e.,
160 - 2P = 100 - P
P* = $60
Q* = 160 - 2(60) = 100 - (60) = 40 units
B. P = 100 - Q
TR1 = 100Q - Q2
MR1 = 100 - 2Q for Q 40
P = 80 - 0.5Q
TR2 = 80Q - 0.5Q2
MR2 = 80 - Q for Q 40
C. MR1 = 100 - 2(40) = $20
MR2 = 80 - (40) = $40
At an output level of 40 units, the marginal cost of production
may vary between $20 and $40 without causing a change in the
equilibrium price and quantity.
D. The firms marginal cost is:
MC = dTC/dQ = $30
which lies in the interval $20 and $40. Thus, the profit-
maximizing price and output level remains $60 and 40,
respectively. Thus,
p* = TR - TC = P*Q* - (100 + 30Q*)
= 60(40) - 100 - 30(40) = $1,100
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