An oligopolist is currently charging a price of $100 and is selling 400 units of
ID: 1124924 • Letter: A
Question
An oligopolist is currently charging a price of $100 and is selling 400 units of output per day. If the firm increases price above $100, the demand curve is P = 1 10-0025) If the firm reduces price below $100, the demand curve becomes P 140-0.1 Q. If the firm's marginal cost curve is horizontal, within what range could marginal cost vary without giving the firm an incentive to change the current price or quantity? a. (110, 140). b. (55, 70) C. (60, 90) d. (80, 120) In a Cournot equilibrium each firm chooses an output level which a. b. maximizes the price received c. maximizes profits given the level of output produced by other firms. d. maximizes revenue given the level of output produced by other firms. maximizes joint profits. 3 A profit-maximizing firm should spend an additional dollar on advertising so long as this expenditure results in more than one dollar of: a. dditional sales b. reduced costs c. increased profits. d. demand. 4 Each firm in a cartel has an incentive to chisel because market price exceeds a. marginal cost. b. average cost. c. average variable cost. d. average fixed cost. 5 The Stackelberg outcome differs from the Cournot equilibrium because a. the games involve different strategic variables b. the first mover can commit to an output off of its best-response function c. antity supplied is not equal to quantity demanded at the prevailing price d. s not a perfectly competitive outcomeExplanation / Answer
The kinked demand curve model applies here. At prices above $100, the price and marginal revenue functions are:
P = 110 – 0.025Q and MR = 110 – 0.05Q
At prices below $100, the demand and marginal revenue functions are:
P = 140 – 0.10Q and MR = 140 – 0.20Q
1)
The firm will continue to charge a price of $100 so long as the optimal level of output is 400 units. Q = 400 will be optimal so long as MC is between the two values of MR located at the kink. Thus, MR = 110 – (0.05)(400) = 90 is the upper limit of MC and MC = 140 – (0.20)(400) = 60 is the lower limit of MC.
Answer: (c)
In a Cournot equilibrium firms maximizes profits given what the other firm produces
2) Ans : (c)
3) Ans : (c) Increased profits
4)
Each firm in a cartel has an incentive to chisel because market price exceeds "marginal cost". And thats why charging more than price decided in cartel would give more profits if one firm decide to break through the cartel.
Under the cartel model, each firm produces where " marginal cost equals marginal revenue.
the answer is A