In the city of new york the underground economy is run by the Italian mafia, the
ID: 1174268 • Letter: I
Question
In the city of new york the underground economy is run by the Italian mafia, the Corleone family and the Japanese mafia, the Yakuza. The industry demand for cocaine is given by: P=24-Q, where Q=qc and qy and qc denotes quantity from Corleone family and qy denotes quantity from Yakuza. Given that the Corleone family has been operating in New York for 10 years before the Yakuza, it has the leader position in the market and the Yakuza is the follower. Here the quantity of cocaine is the decision variable among the organizations. Both organizations have constant marginal costs of 4 per unit.a) Calculate the market price and quantity for the 2 rogue organizations b) What is the profit for the 2 rogue organizations c) State the model for this Oligapolistic industry
Question 2 In the city of New York, the underground economy is run by the Italian mafia, the Corleone family and the Japanese mafia, the Yakuza. The industry demand for cocaine is given by: P 24-Q, where Q-qc and qy and qc denotes quantity from Corleone family and qy denotes quantity from Yakuza. Given that the Corleone family has been operating in New York for 10 years before the Yakuza, it has the leader position in the market and the Yakuza is the follower. Here, the quantity of cocaine is the decision variable among the organizations. Both organizations have constant marginal costs of 4 per unit. (a) Calculate the market price and quantity (gc and qy for the quantity from Corleone family and Yakuza respectively) for the 2 rogue organizations. (b) What is the profit for the 2 rogue organizations. (c) State the model for this Oligopolistic industry.
Explanation / Answer
Corleone is a first mover, it must take the reaction function of Yakuza in its computation of marginal revenue.
Derivation of Yakuza’s reaction function
Total revenue of Yakuza = P*(qy) = (24 – (qc + qy))qy = 24qy – qy2 – qcqy
Marginal revenue = 24 – 2qy – qc
Marginal cost = 4
Solve for the reaction function
24 – 2qy – qc = 4
20 - qc = 2qy
This gives qy = 10 - 0.5qc
Incorporate this in the reaction function of Corleone
Total revenue for Corleone = P*(qc) = (24 – (qc + qy))qc
TR = 24qc - qc^2 - qcqy
= 24qc - qc^2 - qc*(10 - 0.5qc)
= 24qc - qc^2 - 10qc + 0.5qc^2
= 14qc - 0.5qc^2
MR = MC
14 - qc = 4
a) qc = 10 and so qy = 10 - 0.5*10 = 5 units. Market price,= 24 - (10 + 5) = $9
b) Economic profits for Corleone is (9 – 4)*10 = $50 and for Yakuza = (9 – 4)*5 = $25
c) The model belongs to Stackelberg duopoly