Homework 8: Monopolistic Competition/Oligopoly (to be handed in on Thursday 15^th April)

 

1.      What are the key characteristics of a monopolistically competitive market? Some experts have argued that too many brands of breakfast cereal are on the market. Give an argument to support this view, and an argument against this view. (1.5 points)

 

 

2.      Explain the meaning of a Nash equilibrium when firms are competing with respect to price, and give an example. Why is the equilibrium stable? Why don’t the firms raise prices to the level that would maximize joint profits? (1.5 points)

 

 

 

3.      “Because firms in any industry can always make greater profits by colluding, there is an inevitable tendency for competitive industries to become cartels over time”. Applying the Prisoner’s dilemma, briefly discuss the validity of this statement (1 point)

 

 

 

4.      Suppose that two identical firms, Firm 1 and Firm 2, produce widgets and that they are the only firms in the market. Their total costs are given by C_i = 30Q_i, which means MC₁ = 30; MC₂ = 30. The two firms choose their output levels simultaneously, and market demand is given by P = 150 – Q, where Q = Q₁ + Q₂. The marginal revenue schedules for each firm are as follows:

 

MR₁ = 150 – 2Q₁ – Q₂

MR₂ = 150 – 2Q₂ – Q₁

 

a)      Determine each firm’s reaction function and find the Cournot-Nash equilibrium. Determine the output, price and profit of producing widgets for each firm. (2 points)

 

 

b)      Suppose that the two firms collude and form a cartel. What will be the resulting output, price and profit for each firm? [Hint: market marginal revenue is 150 – 2Q, because total revenue = P*Q = (150-Q)*Q] (1 point)

 

 

c)      Suppose Firm 1 were the only firm in the market. How would the market output and Firm 1’s profit differ from that found in your answer to 4b) above? (1 point)

 

 

 

5.      Suppose that the airline industry consisted of only two firms: American and Texas Air Corp. Let the two firms have identical cost functions, C(Q) = 40Q; MC = 40. Assume the demand curve for the industry is given by P = 100 – Q and that each firm expects the other to behave as a Cournot competitor. The marginal revenue schedules for each firm are as follows:

 

MR_A = 100 – 2Q_A – Q_T

MR_T = 100 – 2Q_T – Q_A

 

a)      Calculate the Cournot-Nash equilibrium for each firm, assuming that the each firm choose the output level that maximizes profits taking its rival’s output as given. What are the profits for each firm? (1 point)

 

 

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75 to 150 words

When the economy is in a recessionary mode, what will likely be the actions by the Federal Reserve using monetary policy?

How is the velocity of money related to the level of economic activity?

• Posted: 4 years ago
• Due: 09/12/2015
• Budget: $5

 

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Calculating contribution margin of separate division and firm wide contribution margin in full cost transfer pricing.

 

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19      Probability distribution of forecasts. Assume that the following regression model was applied to histori- cal quarterly data:

et ¼ a0 þ a1INTt þ a2INFt–1 þ mt

where

et ¼ percentage change in the exchange rate of the Japanese yen in period t

 

INTt            ¼ average real interest rate differential (UK interest rate minus Japanese interest rate) over period t

INFt21 ¼ inflation differential (UK inflation rate minus Japanese inflation rate) in the previous period

a0, a1, a2 ¼ regression coefficients

mt                ¼ error term.

Assume that the regression coefficients were esti- mated as follows:

 

a0  ¼ 0:0

a1  ¼ 0:9

a2  ¼ 0:8

Also assume that the inflation differential in the most recent period was 3%. The real interest rate differen- tial in the upcoming period is forecasted as follows:

 

Interest Rate Differential	Probability
0%	30%
1	60
2	10

 

If Stillwater Ltd uses this information to forecast the Japanese yen’s exchange rate, what will be the probability distribution of the yen’s percentage change over the upcoming period?

 

 

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