Question: Suppose that two identical firms produce widgets

> What is a dominant strategy? Why is an equilibrium stable in dominant strategies?

> What is a “tit-for-tat” strategy? Why is it a rational strategy for the infinitely repeated prisoners’ dilemma?

> How does a Nash equilibrium differ from a game’s maximin solution? When is a maximin solution a more likely outcome than a Nash equilibrium?

> Explain the meaning of a Nash equilibrium. How does it differ from an equilibrium in dominant strategies?

> What is the difference between a cooperative and a noncooperative game? Give an example of each.

> Why is the winner’s curse potentially a problem for a bidder in a common-value auction but not in a private-value auction?

> A strategic move limits one’s flexibility and yet gives one an advantage. Why? How might a strategic move give one an advantage in bargaining?

> Can the threat of a price war deter entry by potential competitors? What actions might a firm take to make this threat credible?

> Many retail video stores offer two alternative plans for renting films: • A two-part tariff: Pay an annual membership fee (e.g., $40) and then pay a small fee for the daily rental of each film (e.g., $2 per film per day). • A straight rental fee: Pay n

> What is a “strategic move”? How can the development of a certain kind of reputation be a strategic move?

> What is meant by “first-mover advantage”? Give an example of a gaming situation with a first-mover advantage.

> Suppose you and your competitor are playing the pricing game shown in Table 13.8. Both of you must announce your prices at the same time. Can you improve your outcome by promising your competitor that you will announce a high price?

> Consider a game in which the prisoners’ dilemma is repeated 10 times and both players are rational and fully informed. Is a tit-for-tat strategy optimal in this case? Under what conditions would such a strategy be optimal?

> Two computer firms, A and B, are planning to market network systems for office information management. Each firm can develop either a fast, high-quality system (High), or a slower, low-quality system (Low). Market research indicates that the resulting pr

> Many industries are often plagued by overcapacity: Firms simultaneously invest in capacity expansion, so that total capacity far exceeds demand. This happens not only in industries in which demand is highly volatile and unpredictable, but also in industr

> In many oligopolistic industries, the same firms compete over a long period of time, setting prices and observing each other’s behavior repeatedly. Given the large number of repetitions, why don’t collusive outcomes typically result?

> Defendo has decided to introduce a revolutionary video game. As the first firm in the market, it will have a monopoly position for at least some time. In deciding what type of manufacturing plant to build, it has the choice of two technologies. Technolog

> You play the following bargaining game. Player A moves first and makes Player B an offer for the division of $100. (For example, Player A could suggest that she take $60 and Player B take $40). Player B can accept or reject the offer. If he rejects it, t

> You are a duopolist producer of a homogeneous good. Both you and your competitor have zero marginal costs. The market demand curve is P = 30 ! Q where Q = Q1 + Q2. Q1 is your output and Q2 your competitor’s output. Your competitor has also read this boo

> Elizabeth Airlines (EA) flies only one route: Chicago-Honolulu. The demand for each flight is Q = 500 – P. EA’s cost of running each flight is $30,000 plus $100 per passenger. a. What is the profit-maximizing price that EA will charge? How many people w

> We can think of U.S. and Japanese trade policies as a prisoners’ dilemma. The two countries are considering policies to open or close their import markets. The payoff matrix is shown below. a. Assume that each country knows the payoff m

> Two competing firms are each planning to introduce a new product. Each will decide whether to produce Product A, Product B, or Product C. They will make their choices at the same time. The resulting payoffs are shown below. a. Are there any Nash equilibr

> Two major networks are competing for viewer ratings in the 8:00!9:00 P.M. and 9:00!10:00 P.M. slots on a given weeknight. Each has two shows to fill this time period and is juggling its lineup. Each can choose to put its “biggerâ&

> Two firms are in the chocolate market. Each can choose to go for the high end of the market (high quality) or the low end (low quality). Resulting profits are given by the following payoff matrix: a. What outcomes, if any, are Nash equilibria? b. If the

> Why is the Cournot equilibrium stable? (i.e., Why don’t firms have any incentive to change their output levels once in equilibrium?) Even if they can’t collude, why don’t firms set their outputs at the joint profit-maximizing levels (i.e., the levels the

> Some experts have argued that too many brands of breakfast cereal are on the market. Give an argument to support this view. Give an argument against it.

> Why is the firm’s demand curve flatter than the total market demand curve in monopolistic competition? Suppose a monopolistically competitive firm is making a profit in the short run. What will happen to its demand curve in the long run?

> What are the characteristics of a monopolistically competitive market? What happens to the equilibrium price and quantity in such a market if one firm introduces a new, improved product?

> Why has the OPEC oil cartel succeeded in raising prices substantially while the CIPEC copper cartel has not? What conditions are necessary for successful cartelization? What organizational problems must a cartel overcome?

> Why does price leadership sometimes evolve in oligopolistic markets? Explain how the price leader determines a profit-maximizing price.

> A monopolist is deciding how to allocate output between two geographically separated markets (East Coast and Midwest). Demand and marginal revenue for the two markets are: P 1 = 15 – Q1 MR 1 = 15 – 2Q1 P 2 = 25 – 2Q2 MR 2 = 25 – 4Q2 The monopo

> The kinked demand curve describes price rigidity. Explain how the model works. What are its limitations? Why does price rigidity occur in oligopolistic markets?

> Explain the meaning of a Nash equilibrium when firms are competing with respect to price. Why is the equilibrium stable? Why don’t the firms raise prices to the level that maximizes joint profits?

> What do the Cournot and Bertrand models have in common? What is different about the two models?

> In the Stackelberg model, the firm that sets output first has an advantage. Explain why.

> Two firms compete in selling identical widgets. They choose their output levels Q1 and Q2 simultaneously and face the demand curve P = 30 – Q where Q = Q1 + Q2. Until recently, both firms had zero marginal costs. Recent environmental regulations have in

> This exercise is a continuation of Exercise 3. We return to two firms with the same constant average and marginal cost, AC = MC = 5, facing the market demand curve Q1 + Q2 = 53 – P. Now we will use the Stackelberg model to analyze what will happen if one

> A monopolist can produce at a constant average (and marginal) cost of AC = MC = $5. It faces a market demand curve given by Q = 53 – P. a. Calculate the profit-maximizing price and quantity for this monopolist. Also calculate its profits. b. Suppose a s

> Consider two firms facing the demand curve P = 50 – 5Q, where Q = Q1 + Q2. The firms’ cost functions are C1(Q1) = 20 + 10Q1 and C2(Q2) = 10 + 12Q2. a. Suppose both firms have entered the industry. What is the joint profit-maximizing level of output? How

> Suppose all firms in a monopolistically competitive industry were merged into one large firm. Would that new firm produce as many different brands? Would it produce only a single brand? Explain.

> A lemon-growing cartel consists of four orchards. Their total cost functions are: TC is in hundreds of dollars, and Q is in cartons per month picked and shipped. a. Tabulate total, average, and marginal costs for each firm for output levels between 1 an

> Why might a firm have monopoly power even if it is not the only producer in the market?

> Suppose the market for tennis shoes has one dominant firm and five fringe firms. The market demand is Q = 400 – 2P. The dominant firm has a constant marginal cost of 20. The fringe firms each have a marginal cost of MC = 20 + 5q. a. Verify that the tota

> The dominant firm model can help us understand the behavior of some cartels. Let’s apply this model to the OPEC oil cartel. We will use isoelastic curves to describe world demand W and noncartel (competitive) supply S. Reasonable number

> Two firms compete by choosing price. Their demand functions are Q 1 = 20 – P1 + P2 and Q2 = 20 + P1 – P2 where P1 and P2 are the prices charged by each firm, respectively, and Q1 and Q2 are the resulting demands. Note that the demand for each g

> Two firms produce luxury sheepskin auto seat covers, Western Where (WW) and B.B.B. Sheep (BBBS). Each firm has a cost function given by C (q) = 30q + 1.5q2 The market demand for these seat covers is represented by the inverse demand equation P = 300 – 3

> Demand for light bulbs can be characterized by Q = 100 – P, where Q is in millions of boxes of lights sold and P is the price per box. There are two producers of lights, Everglow and Dimlit. They have identical cost functions: a. Unable

> Suppose the airline industry consisted of only two firms: American and Texas Air Corp. Let the two firms have identical cost functions, C(q) = 40q. Assume the demand curve for the industry is given by P = 100 – Q and that each firm expects the other to b

> Suppose that two competing firms, A and B, produce a homogeneous good. Both firms have a marginal cost of MC = $50. Describe what would happen to output and price in each of the following situations if the firms are at (i) Cournot equilibrium, (ii) collu

> Ajax Computer makes a computer for climate control in office buildings. The company uses a microprocessor produced by its upstream division, along with other parts bought in outside competitive markets. The microprocessor is produced at a constant margin

> Review the numerical example about Race Car Motors. Calculate the profit earned by the upstream division, the downstream division, and the firm as a whole in each of the three cases examined: (a) there is no outside market for engines; (b) there is a c

> Why is there no market supply curve under conditions of monopoly?

> The House Products Division of Acme Corporation manufactures and sells digital clock radios. A major component is supplied by the electronics division of Acme. The cost functions for the radio and the electronic component divisions are, respectively, Not

> Reebok produces and sells running shoes. It faces a market demand schedule P = 11 – 1.5QS, where QS is the number of pairs of shoes sold and P is the price in dollars per pair of shoes. Production of each pair of shoes requires 1 square yard of leather.

> Give some examples of third-degree price discrimination. Can third-degree price discrimination be effective if the different groups of consumers have different levels of demand but the same price elasticities?

> Electric utilities often practice second-degree price discrimination. Why might this improve consumer welfare?

> How does a car salesperson practice price discrimination? How does the ability to discriminate correctly affect his or her earnings?

> Suppose a firm can practice perfect, first-degree price discrimination. What is the lowest price it will charge, and what will its total output be?

> How can a firm check that its advertising-to-sales ratio is not too high or too low? What information does it need?

> Why is it incorrect to advertise up to the point that the last dollar of advertising expenditures generates another dollar of sales? What is the correct rule for the marginal advertising dollar?

> How does tying differ from bundling? Why might a firm want to practice tying?

> How does mixed bundling differ from pure bundling? Under what conditions is mixed bundling preferable to pure bundling? Why do many restaurants practice mixed bundling (by offering a complete dinner as well as an à la carte menu) instead of pure bundling

> We write the percentage markup of prices over marginal cost as (P – MC)/P. For a profit maximizing monopolist, how does this markup depend on the elasticity of demand? Why can this markup be viewed as a measure of monopoly power?

> Why did MGM bundle Gone with the Wind and Getting Gertie’s Garter? What characteristic of demands is needed for bundling to increase profits?

> In the town of Woodland, California, there are many dentists but only one eye doctor. Are senior citizens more likely to be offered discount prices for dental exams or for eye exams? Why?

> Why is the pricing of a Gillette safety razor a form of two-part tariff? Must Gillette be a monopoly producer of its blades as well as its razors? Suppose you were advising Gillette on how to determine the two parts of the tariff. What procedure would yo

> How can a firm determine an optimal two-part tariff if it has two customers with different demand curves?

> How is peak-load pricing a form of price discrimination? Can it make consumers better off? Give an example.

> When pricing automobiles, American car companies typically charge a much higher percentage markup over cost for “luxury option” items (such as leather trim, etc.) than for the car itself or for more “basic” options such as power steering and automatic tr

> How do the antitrust laws limit market power in the United States? Give examples of major provisions of the laws.

> Show why optimal, third-degree price discrimination requires that marginal revenue for each group of consumers equals marginal cost. Use this condition to explain how a firm should change its prices and total output if the demand curve for one group of c

> Why is there a social cost to monopsony power? If the gains to buyers from monopsony power could be redistributed to sellers, would the social cost of monopsony power be eliminated? Explain briefly.

> What are some sources of monopsony power? What determines the amount of monopsony power an individual firm is likely to have?

> What is meant by the term “monopsony power”? Why might a firm have monopsony power even if it is not the only buyer in the market?

> How should a monopsonist decide how much of a product to buy? Will it buy more or less than a competitive buyer? Explain briefly.

> Why will a monopolist’s output increase if the government forces it to lower its price? If the government wants to set a price ceiling that maximizes the monopolist’s output, what price should it set?

> Why is there a social cost to monopoly power? If the gains to producers from monopoly power could be redistributed to consumers, would the social cost of monopoly power be eliminated? Explain briefly.

> What factors determine the amount of monopoly power an individual firm is likely to have? Explain each one briefly.

> What are some of the different types of barriers to entry that give rise to monopoly power? Give an example of each.

> A monopolist faces the following demand curve: Q = 144/P2 where Q is the quantity demanded and P is price. Its average variable cost is AVC = Q1/2 and its fixed cost is 5. a. What are its profit-maximizing price and quantity? What is the resulting pro

> A certain town in the Midwest obtains all of its electricity from one company, Northstar Electric. Although the company is a monopoly, it is owned by the citizens of the town, all of whom split the profits equally at the end of each year. The CEO of the

> Suppose that BMW can produce any quantity of cars at a constant marginal cost equal to $20,000 and a fixed cost of $10 billion. You are asked to advise the CEO as to what prices and quantities BMW should set for sales in Europe and in the United States.

> There are 10 households in Lake Wobegon, Minnesota, each with a demand for electricity of Q = 50 – P. Lake Wobegon Electric’s (LWE) cost of producing electricity is TC = 500 + Q. a. If the regulators of LWE want to make sure that there is no deadweight

> Dayna’s Doorstops, Inc. (DD) is a monopolist in the doorstop industry. Its cost is C = 100 – 5Q + Q2, and demand is P = 55 – 2Q. a. What price should DD set to maximize profit? What output does the firm produce? How much profit and consumer surplus does

> The employment of teaching assistants (TAs) by major universities can be characterized as a monopsony. Suppose the demand for TAs is W = 30,000 – 125n, where W is the wage (as an annual salary), and n is the number of TAs hired. The supply of TAs is give

> You produce widgets for sale in a perfectly competitive market at a market price of $10 per widget. Your widgets are manufactured in two plants, one in Massachusetts and the other in Connecticut. Because of labor problems in Connecticut, you are forced t

> Michelle’s Monopoly Mutant Turtles (MMMT) has the exclusive right to sell Mutant Turtle t-shirts in the United States. The demand for these t-shirts is Q = 10,000/P2. The firm’s short-run cost is SRTC = 2000 + 5Q, and its long-run cost is LRTC = 6Q. a.

> A monopolist faces the demand curve P = 11 – Q, where P is measured in dollars per unit and Q in thousands of units. The monopolist has a constant average cost of $6 per unit. a. Draw the average and marginal revenue curves and the average and marginal c

> One of the more important antitrust cases of the 20th century involved the Aluminum Company of America (Alcoa) in 1945. At that time, Alcoa controlled about 90 percent of primary aluminum production in the United States, and the company had been accused

> A drug company has a monopoly on a new patented medicine. The product can be made in either of two plants. The costs of production for the two plants are MC1 = 20 + 2Q1 and MC2 = 10 + 5Q2. The firm’s estimate of demand for the product is P = 20 – 3(Q1 +

> A firm has two factories for which costs are given by: Factory #1: C1(Q1) = 10Q12 Factory #2: C2(Q2) = 20Q22 The firm faces the following demand curve: P = 700 – 5Q where Q is total output – i.e., Q = Q1 + Q2. a. On a diagram, draw the marginal cost c

> Suppose a profit-maximizing monopolist is producing 800 units of output and is charging a price of $40 per unit. a. If the elasticity of demand for the product is –2, find the marginal cost of the last unit produced. b. What is the firm’s percentage ma

> In Example 11.1, we saw how producers of processed foods and related consumer goods use coupons as a means of price discrimination. Although coupons are widely used in the United States, that is not the case in other countries. In Germany, coupons are il

> Suppose that an industry is characterized as follows: C = 100 + 2q2………….each firm’s total cost function MC = 4q………………..firm’s marginal cost function P = 90 – 2Q…………… industry demand curve MR = 90 – 4Q……industry marginal revenue curve a. If there is

> The following table shows the demand curve facing a monopolist who produces at a constant marginal cost of $10: Price…….……………………………………………………………Quantity 18………………………………………………………………………………...0 16..…………………………………………………………………………………4 14..………………………………………………………………

> A firm faces the following average revenue (demand) curve: P = 120 – 0.02Q where Q is weekly production and P is price, measured in cents per unit. The firm’s cost function is given by C = 60Q + 25,000. Assume that the firm maximizes profits. a. What

> A monopolist firm faces a demand with constant elasticity of –2.0. It has a constant marginal cost of $20 per unit and sets a price to maximize profit. If marginal cost should increase by 25 percent, would the price charged also rise by 25 percent?

> Caterpillar Tractor, one of the largest producers of farm machinery in the world, has hired you to advise it on pricing policy. One of the things the company would like to know is how much a 5-percent increase in price is likely to reduce sales. What wou

> Will an increase in the demand for a monopolist’s product always result in a higher price? Explain. Will an increase in the supply facing a monopsonist buyer always result in a lower price? Explain.

> Externalities arise solely because individuals are unaware of the consequences of their actions. Do you agree or disagree? Explain.