01:220:102 Lecture Notes - Lecture 17: Nash Equilibrium

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scarletmoose824

31 Oct 2017

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Oligopoly: an industry with only a small number of producers. Oligopolist: a producer in such an industry. Imperfect competition: when no one firm has a monopoly, but producers nonetheless realize that they can affect market prices. Duopoly: an oligopoly consisting of only two firms. Collusion: when sellers cooperate to raise their joint profit. Cartel: an agreement among several producers to obey output restrictions in order to increase their joint profits. Noncooperative behavior: when firms ignore the effects of their actions on each others" profits. Interdependence: when a firm"s decision significantly affects the profits of other firms in the industry. Game theory: the study of behavior in situations of interdependence. Payoff: the reward received by a player in a game, such as the profit earned by an oligopolist. Payoff matrix: shows how the payoff to each of the participants in a two-player game depends on the actions of both.

Related Questions

1) A natural monopoly exists when:

a. A few firms collude to make one large firm

b. Firms enter the industry as a result of profit incentives

c. Economies of scale provide large cost advantages to having one firm produce the industry's output

d. Firms naturally maximize regardless of market structure

2) A(n) ____ is a single firm with ___, whereas a(n) ___ implies an industry with ____ firm(s) and ____ .

a. Monopoly; barriers to entry; oligopoly; few; no barriers to entry

b. Oligopoly; no barriers to entry; monopoly; many; easy entry and exit

c. Monopoly; barriers to entry; monopolistic competition; many; easy entry and exit

d. Monopolistic competitor; barriers to entry; monopoly; one; barriers to entry

3) In monopolistic competition:

a. Each firm produces a product identical to that of every other firm in the industry

b. Firms are aware of their strategic interdependence

c. Firms earn large economic profits in the long run

d. Firms earn zero economic profits in the long run

4) A monopolistically competitive industry, such as corn snack chips, and a perfectly competitive industry, like wheat farming, are alike in that:

a. There are many firms in each industry

b. Firms in both types of industries produce similar but not identical products

c. Barriers to entry in both industries are large

d. Firms in both types of industries produce identical products

byzantiumfish483

1) When a utility charges homeowners less on a per-unit basis than corporate users it is practicing:

a) first-degree price discrimination

b) second-degree price discrimination

c) third-degree price discrimination

d) markup pricing

e) tying

2) when an electrical utility charges higher prices during the day than at night it is practicing:

a) peak-load pricing

b) first-degree price discrimination

c) second-degree price discrimination

d) third-degree price discrimination

e) fourth-degree price discrimination

3) Gliberace's Fashion Accessories of Las Vegas produces gemstone-encrusted formal wear for sale in Los Angeles and San Francisco subject to total cost TC = 100 + 5(Q_LA + Q_SF). Demand for Gliberace's stones in the two cities is given by Q_LA = 70 - 2P_LA and Q_SF = 55 - P_SF. If Gliberace price discriminates between the two cities, how many stones will it sell in L?

a) 30

b) 36

c) 38

d) 43

e) 48

4) Game theory is useful for understanding oligopoly behavior because:

a) there are so many firms in an oligopoly that all are price takers

b) firms must differentiate their products if they are to remain in business

c) firms recognize that because there are only a few firms mutual interdependence is important

d) without it firms would not be able to maintain cartel agreements

e) it allows firms to develop greater monopoly power

5) A feasible strategy set is:

a) all actions with a nonzero probability of occurring

b) only actions that have a 50 percent or greater probability of occurring

c) actions that result in positive profits for the firm

d) actions hat a decision-maker is willing to take

e) the outcome that the decision-maker chooses

6) In a two-player game in which each player has four options how many outcomes can there be:

a) 1

b) 4

c) 8

d) 16

e) 64

peachmosquito810

2. Deviating from the collusive outcome

Mays and McCovey are beer-brewing companies that operate in a duopoly (two-firm oligopoly). The daily marginal cost (MC) of producing a can of beer is constant and equals $0.80 per can. Assume that neither firm had any startup costs, so marginal cost equals average total cost (ATC) for each firm.

Suppose that Mays and McCovey form a cartel, and the firms divide the output evenly. (Note: This is only for convenience; nothing in this model requires that the two companies must equally share the output.)

Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and combined quantity of output if Mays and McCovey choose to work together.

Monopoly Outcome PRICE (Dollars per can)QUANTITY (Thousands of cans of beer)DemandMRMC = ATC

When they act as a profit-maximizing cartel, each company will producecans and chargeper can. Given this information, each firm earns a daily profit of, so the daily total industry profit in the beer market is.

Oligopolists often behave noncooperatively and act in their own self-interest even though this decreases total profit in the market. Again, assume the two companies form a cartel and decide to work together. Both firms initially agree to produce half the quantity that maximizes total industry profit. Now, suppose that Mays decides to break the collusion and increase its output by 50%, while McCovey continues to produce the amount set under the collusive agreement.

Maysâs deviation from the collusive agreement causes the price of a can of beer to toper can. Mays's profit is now, while McCoveyâs profit is now. Therefore, you can conclude that total industry profit when Mays increases its output beyond the collusive quantity.

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01:220:102 Lecture Notes - Lecture 17: Nash Equilibrium

01:220:102 Full Course Notes

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