Microeconomics
21st Edition
ISBN: 9781259915727
Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Question
Chapter 14, Problem 2P
Sub part (a):
To determine
How monopolistic competition differs from pure competition.
Sub part (b):
To determine
How monopolistic competition differs from pure competition.
Sub part (c):
To determine
How monopolistic competition differs from pure competition.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Consider whether the promises and threats made toward each other by duopolists and oligopolists are always credible (believable).
Look at the figure below. Imagine that the two firms will play this game twice in sequence and that each firm publicly proclaims the
following policy. Each says that if both it and the other firm choose the high price in the first game, then it will also choose the high
price in the second game (as a reward to the other firm for cooperating in the first game). (Note: Profit payoffs are shown in millions of
dollars.)
RareAir's price strategy
High
Low
$12
$15
High
$12
$6
C
$6
$8
Low
$15
$8
a. As a first step toward thinking about whether this policy is credible, consider the situation facing both firms in the second game. If
each firm bases its decision on what to do in the second game entirely on the payouts facing the firms in the second game, which
strategy will each firm choose in the second game?
|(Click to select)
b. Now move backward in time one step.…
Consider whether the promises and threats made toward each other by duopolists and oligopolists are always credible (believable).
Look at the figure below. Imagine that the two firms will play this game twice in sequence and that each firm publicly proclaims the
following policy. Each says that if both it and the other firm choose the high price in the first game, then it will also choose the high
price in the second game (as a reward to the other firm for cooperating in the first game). (Note: Profit payoffs are shown in millions of
dollars.)
RareAir's price strategy
High
Low
$12
$15
A
High
$12
$6
$6
D
$8
Low
$15
$8
a. As a first step toward thinking about whether this policy is credible, consider the situation facing both firms in the second game. If
each firm bases its decision on what to do in the second game entirely on the payouts facing the firms in the second game, which
strategy will each firm choose in the second game?
(Click to select)
b. Now move backward in time one step.…
Consider whether the promises and threats made toward each other by duopolists and
oligopolists are always credible (believable). Look at the figure below. Imagine that the
two firms will play this game twice in sequence and that each firm claims the following
policy. Each says that if both it and the other firm choose the high price in the first game,
then it will also choose the high price in the second game (as a reward to the other firm
for cooperating in the first game).
RareAir's price strategy
High
Low
$12
$15
A
В
High
$12
$6
$6
$8
Low
$15
$8
a. As a first step toward thinking about whether this policy is credible, consider the
situation facing both firms in the second game. If each firm bases its decision on what to
do in the second game entirely on the payouts facing the firms in the second game, which
strategy will each firm choose in the second game?
(Click to select)
b. Now move one step back. Imagine that it is the start of the first game and each firm
must decide what to…
Chapter 14 Solutions
Microeconomics
Ch. 14.2 - Prob. 1QQCh. 14.2 - The D2e segment of the demand curve D2eD1 in graph...Ch. 14.2 - Prob. 3QQCh. 14.2 - Prob. 4QQCh. 14 - Prob. 1DQCh. 14 - Prob. 2DQCh. 14 - Prob. 3DQCh. 14 - Prob. 4DQCh. 14 - Prob. 5DQCh. 14 - Prob. 6DQ
Ch. 14 - Prob. 7DQCh. 14 - Prob. 8DQCh. 14 - Prob. 9DQCh. 14 - Prob. 10DQCh. 14 - Prob. 11DQCh. 14 - Prob. 12DQCh. 14 - Prob. 13DQCh. 14 - Prob. 14DQCh. 14 - Prob. 1RQCh. 14 - Prob. 2RQCh. 14 - Prob. 3RQCh. 14 - Prob. 4RQCh. 14 - Prob. 5RQCh. 14 - Prob. 6RQCh. 14 - Prob. 7RQCh. 14 - Prob. 8RQCh. 14 - Prob. 9RQCh. 14 - Prob. 10RQCh. 14 - Prob. 1PCh. 14 - Prob. 2PCh. 14 - Prob. 3P
Knowledge Booster
Similar questions
- Consider a two-player game between Child's Play and Kid's Corner, each of which produces and sells swing sets for children. Each player can set either a high or a low price for a standard two-swing, one-slide set. If they both set a high price, each receives profits of $64,000 per year. If one sets a low price and the other sets a high price, the low-price firm earns profits of $72,000 per year, while the high-price firm earns $20,000. If they both set a low price, each receives profits of $57,000. Assume also that the annual discount rate is r = 25%, or 8 = 0.8. The price-setting game in each year could be represented in the following normal form: CP (row)/ KC (column) High Price Low Price Game between CP and KC High Price 64, 64 72, 20 Low Price 20, 72 57, 57 a) What is the stage equilibrium of the prisoners' dilemma between CP and KC? i.(L,H) ii. (H,L) iii. (L,L) iiii. (H,H) b) What is the cooperative strategy profile? i.(L,H) ii. (H,L) iii. (L,L) iiii. (H,H) c) Suppose we repeated…arrow_forwardConsider a “punishment” variation of the two-firm oligopoly situation shown in Figure 14.1. Suppose that if one firm sets a low price while the other sets a high price, then the firm setting the high price can fine the firm setting the low price. Suppose that whenever a fine is imposed, X dollars is taken from the low-price firm and given to the high-price firm. What is the smallest amount that the fine X can be such that both firms will want to always set the high price?arrow_forwardConsider two firms who compete with each other in terms of quantity. If the inverse market demand and total costs of the firms are given by P = 140 – Q TC, = 20q, + 10 TC2 = 20q1 + 10 a. Find the Response (Reaction) functions of each curve b. Find the Nash Equilibrium of this Cournot duopoly game c. Graphically represent this equilibrium using their Response (Reaction) curves d. Suppose these two firms collude and form a cartel, what will the equilibrium be under this situation e. Is the equilibrium under (d) sustainable or not and why? f. Suppose that both firms have agreed that firm 1 is a leader and firm 2 is a follower, find the Nash equilibrium of this sequential gamearrow_forward
- Sometimes oligopolies in the same industry are very different in size. Suppose we have a duopoly where one firm (Firm A) is large and the other firm (Firm B) is small, as the prisoner’s dilemma box in Table 10.4 shows. Firm B colludes with Firm A Firm B cheats by selling more output Firm A colludes with Firm B A gets $1,000, B gets $100 A gets $800, B gets $200 Firm A cheats by selling more output A gets $1,050, B gets $50 A gets $500, B gets $20 Table10.4 Assuming that both firms know the payoffs, what is the likely outcome in this case?arrow_forwardPerrier and Apollinaris. Perrier and Apollinaris are two companies that sell mineral water in Tampa, FL. Each company has a fixed cost of $5,000 per period, regardless whether they sell anything or not. The two companies are competing for the same market and each firm must choose a high price ($2 per bottle) or a low price ($1 per bottle). Here are the rules of the game: At a price of $2, 5,000 bottles can be sold for total revenue of $10,000. At a price of $1, 10,000 bottles can be sold for total revenue of $10,000. If both companies charge the same price, they split the sales evenly between them. If one company charges a higher price, the company with the lower price sells the whole amount and the company with the higher price sells nothing. Payoffs are total profits. In this case, Apollinaris has: no dominant strategy. Perrier has a dominant strategy of P=$1. a dominant strategy of P=$1. Perrier also has a dominant strategy of P=$2. a dominant strategy…arrow_forwardPerrier and Apollinaris. Perrier and Apollinaris are two companies that sell mineral water in Tampa, FL. Each company has a fixed cost of $5,000 per period, regardless whether they sell anything or not. The two companies are competing for the same market and each firm must choose a high price ($2 per bottle) or a low price ($1 per bottle). Here are the rules of the game: At a price of $2, 5,000 bottles can be sold for total revenue of $10,000. At a price of $1, 10,000 bottles can be sold for total revenue of $10,000. If both companies charge the same price, they split the sales evenly between them. If one company charges a higher price, the company with the lower price sells the whole amount and the company with the higher price sells nothing. Payoffs are total profits. In this case, the NE is(are): (P=$2, P=$1). (P=$1, P=$2). (P=$2, P=$2). (P=$1, P=$1).arrow_forward
- Is the game shown by Figure 11.3 in the chapter (not this appendix) a zero-sum game or is it a positive-sum game? How can you tell? Are there dominant strategies in this game? If so, what are they? What cell represents a Nash equilibrium and why? Explain why it is so difficult for Uptown and RareAir to achieve and maintain a more favorable cell than the Nash equilibrium in this single-period pricing game.arrow_forwardSuppose, due to a massive global recession, only two local banks survived the recession (SMBank and A&L Bank) with equal market share. SMBank is considering several duopolistic competitive strategies, with respect to their pricing of loans, to increase profits. SM Bank hires you as an intern to evaluate all possible strategies. a) List and describe the nature of all feasible simultaneous move strategies in which SMBank may be engaged, in the context of this example. Be sure to use graphs where applicable.arrow_forwardConsider a Cournot duopoly. The inverse demand function of the market is given by p = 10-Q, where p is the market price, and Q = 91 +92 is the aggregate output. The marginal costs of the two firms are C₁ 1 and C₂ = 4. = (a) Solve for the Nash equilibrium of the game including firm out- puts, market price, aggregate output, and firm profits. (b) Now suppose these two firms play a 2-stage game. In stage 1, they produce capacities 9₁ and 92, which are equal to the Nash equilibrium quantities of the Cournot game characterised by part (a). In stage 2, they simultaneously decide on their prices p₁ and P2. The marginal cost for each firm to sell up to capacity is 0. It is impossible to sell more than capacity. The residual demand for 10 Piāj if Pi > Pj firm ij, is Di (Pi, Pj) = 10-Pi 2 = if pipi. (Note, if Pi < Pj 10 - Pi here we assume that the efficient/parallel rationing applies). Prove that it is a Nash equilibrium of the second stage subgame that each firm charges the market clearing…arrow_forward
- There is an oligopolistic market with three firms: A, B, and C. The market demand is Q=300-2P. Firm A's cost is TCA=75Q. Firm B's cost is TCB=65Q. Firm C's cost is TCC=60Q. Assume that the three firms compete by setting prices (Bertrand Game). a. If firm A's price is PA=100 and firm B's price is Pa=95, what is firm C's best response? Give your result with two decimal places. b. At Nash equilibrium, what is the price charged by each firm? c. At Nash equilibrium, what is the quantity sold by each firm? d. At Nash equilibrium, what is each firm's profit?arrow_forwardIn the market for video game consoles, Microsoft and Sony are essentially a duopoly, with Nintendo at a distant third. Consider a purely hypothetical game in which the executives of the two companies are deciding how much they will spend on advertising. To simplify, assume that they can either spend a lot or spend a little. If both firms spend a lot, Sony's hypothetical profit will be $2 billion and Microsoft's hypothetical profit will be $1 billion. If they both spend a little, Sony's profit will be $9 billion and Microsoft's profit will be $7 billion. If Sony spends a lot and Microsoft spends a little, Sony's profit will be $8 billion and Microsoft's profit will be $2 billion. Finally, if Sony spends a little and Microsoft spends a lot, Sony's profit will be $3 billion and Microsoft's profit will be $6 billion. Create the payoff matrix for this game. Does Sony have a dominant strategy? If so, what is it? Does Microsoft have a dominant strategy? If so, what is…arrow_forwardTwo firms are playing an infinitely-repeated prisoner's dilemma pricing game of the following form: Firm 1 Firm 2 Low price High Price Low price 4, 4 20, 0 High price 0, 20 12,12 Consider the decision to cheat ONLY ONCE for a firm in this game against the opponent that is a Tit-for-Tat player. Cheating firm gets an extra in payoffs for the first round, but has to face $0 payoffs for the second round in order to be able to bring the opponent to the collusive outcome again in the third round. What is the minimum rate of return (r) that would make defecting only once? Show your calculations.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Managerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning