ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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Consider the curve shown in the figure below, which shows the market demand, marginal cost, and marginal revenue curve for firms in an oligopolistic industry. (MC curve is horizontal because it is assumed that the fixed costs are 0 for all firms and the
- Suppose the firms collude to form a cartel. What
price will the cartel charge? What quantity will the cartel supply? How much profit will the cartel earn? - Suppose now that the cartel breaks up and the oligopolistic firms compete as vigorously as possible by cutting the price and increasing sales. What will the industry quantity and price be? What will the collective profits be of all firms in the industry?
- Compare the
equilibrium price , quantity, and profit for the cartel and cutthroat competition outcomes.
Transcribed Image Text:**Educational Text:**
**Title: Understanding Market Dynamics in Oligopolistic Industries**
Consider the curve shown in the figure below, which illustrates the market demand and marginal revenue curve for firms in an oligopolistic industry. Here, it's assumed that the fixed costs are zero for all firms and the average variable cost (AVC) is constant, making the average total cost (ATC) also constant.
**Diagram Explanation:**
- The vertical axis represents the price (P), and the horizontal axis represents the quantity (Q).
- The downward-sloping line labeled "Demand" illustrates how the quantity demanded decreases as the price increases.
- The "Marginal Revenue" curve also slopes downward and lies below the demand curve, indicating that marginal revenue decreases with an increase in quantity sold.
- A horizontal line labeled "Marginal Cost" represents the constant marginal cost for firms in this market.
**Problem:**
a. Suppose the firms collude to form a cartel. What price will the cartel charge?
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This graph effectively demonstrates key concepts in oligopolistic market structures, including demand, marginal revenue, and marginal cost. Understanding these interactions is crucial in determining a firm's pricing and output strategies within such industries.
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- A Cournot Oligopoly (duopoly) exists where the market demand function facing each of the two firms is P = 4 - (Q1 + Q2) , where Q = (Q1 + Q2) and the MC facing each firm is zero. If the two firms form a cartel, what is the market quantity (Q) and market price (P) that will prevail? 4/3, 4/3 3,1 1,3 2,2arrow_forwardConsider a market that is a Bertrand oligopoly with 5 firms in the market. Each of these firms produce an identical product and each have the same cost function of C(Q) = 80Q. The inverse market demand for this product is P = 2480 – 2Q. What is the equilibrium market price?arrow_forwardSuppose firms A, B, and C set prices while facing per-period demand of Q = 200 - P, which yields a MR curve MR = 200 – 2Q for a monopolist. When setting prices non-cooperatively, the firms choose their prices simultaneously. All firms have MC = 20. The firms are currently involved in a cartel that sets the monopoly price and divides quantity evenly among the firms. The firms enforce their cartel arrangement with a grim trigger strategy. The Department of Justice (DOJ) has just started an antitrust division that is designed to break up cartels. The DOJ successfully detects and prosecutes a cartel with probability s, and prosecuted cartels receive the fine F and are prevented from ever colluding again. The firms believe that their interaction will continue forever (p = 1.0), and they discount future periods at R 0.80. I. Which strategic variable are the firms choosing? What type of competition is this? O A. Quantity; Cournot O B. Quantity; Bertrand C. Price; Cournot O D. Price; Bertrand…arrow_forward
- In an industry with inverse demand curve there are five firms, each of which has a constant marginal cost given by p = 100 - 2Q, MC = 20. If the firms form a profit-maximizing cartel and agree to operate subject to the constraint that each firm will produce the same output level, how much does each firm produce? Each firm will produce q = units. (Enter your response as a whole number.)arrow_forwardIf Gulfstream and Bombardier, both producers of upscale jet airplanes, were to collude rather than compete, consumers could expect: Group of answer choices A) higher prices and higher quantities offered for sale. B) higher prices and lower quantities offered for sale. C) one firm to emerge as the price leader in the oligopoly. D) lower prices and lower quantities offered for sale. E) each firm to cheat on the cartel agreement.arrow_forwardNonearrow_forward
- Consider a duopolistic market with an inverse demand curve P(Q) = 460 − 4Qand constant marginal costs for each firm that are given by MC(Q) = 10.Assume fixed costs are negligible. The two identical firms are competing in this market by choosing their production quantities simultaneously. In the equilibrium, each firm produces 37.5 units and the prevailing market price is 160. How would the joint profits of these two firms change if they successfully formed a cartel? Change in joint profits: ? (Enter your answer rounded to two decimal places; include a negative sign if appropriate.)arrow_forwardOutline the characteristics of an oligopoly and explain why firms in this particular market structure face a choice between competition and collusion.arrow_forwardAirline Manufacturer A and Airline Manufacturer B are duopolists in their industry. Explain how the two firms could collectively benefit if they were to collude and form a cartel. Why might collusion be difficult?arrow_forward
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