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E217 Monopolistic competitive market and oligopoly 1.

A soft-drink firm sells its particular brand of cola has a loyal following of consumers who believe the companys cola is better than those of its competitors. The cola company prices its product so as to maximize profits. Currently the marginal cost of a liter of the cola is $1 at the profit maximizing output. Draw a graph to show that the price of the cola will exceed $1 per liter. Suppose the cola company, through a new advertising campaign, succeeds in making the demand for its product more elastic. This means that the price corresponding to any given marginal revenue will now be greater than before. Assuming that the marginal cost at the profit maximizing output is still $1, use the graph you drew for the previous situation to show that the price the firm sets is now be higher. 2. Suppose that the market demand for mountain spring water is given as follows: P = 1200 Q Mountain spring water can be produced at no cost. a. What is the profit maximizing level of output and price for monopolist? b. What level of output would be produced by each firm in a Cournot duopoly in the long run? What will the price be? c. What will be the level of output and price in the long run if this industry were perfectly competitive? 3. Bartels and James are two individuals who one day discover a stream that flows wine cooler instead of water. Bartels and James decide to bottle the wine cooler and sell it. The marginal cost of bottling wine cooler and the fixed cost to bottle wine cooler are both zero. The market demand for bottled wine cooler is given as: P=90 0.25Q, where Q is the total quantity of bottled wine cooler produced and P is the market price of bottled wine cooler. a. What is economically efficient price of bottled wine cooler? b. What is economically efficient quantity of bottled wine cooler produced? c. If Bartels and James were to collude with one another and produce the profit-maximizing monopoly quantity of bottled wine cooler, how much bottled wine cooler will they produce? d. Given the output level in (c), what price will Bartels and James charge for bottled wine cooler? e. At the output level in (c), what is welfare loss? f. Suppose that Bartels and James act as Cournot duopolists, what are the reaction functions for Bartels and for James? g. In the long run, what level of output will Bartels produce if Bartels and James act as Cournot duopolists? h. In the long run, what will the price of wine coolers be if Bartels produce if Bartels and James act as Cournot duopolists? i. Suppose that after Bartels and James have arrived at their long run equilibrium as Cournot duopolists, another individual, Paul Mason, discovers the streams. Paul Mason, who will sell no wine cooler before its time, decides to bottle wine coolers. There are now three firms pproducing at once. In the long run, what level of output will Bartels produce? 4. Two large diversified consumer product firms are about to enter the market for a new pain reliever. The two firms are very similar in terms of their costs. Strategic approach, and market outlook. Moreover, the firms have vry similar individual demand curves so that each firm expects to sell one half of the total market output at any given price. The market demand curve for the pain reliever is given as: Q=2600 400P Both firms have constant long-run average costs of $2.00 per bottle. Patent protection insures that the two firms will operate as duopoly for the foreseeable future. Price and quantities are per bottle. If the firm acts as Counot duopolists, solve for the firm and market outputs and equilibrium prices.