/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Q7E Suppose that two competing firms... [FREE SOLUTION] | 91影视

91影视

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) collusive equilibrium, and (iii) Bertrand equilibrium.

(a) Because Firm A must increase wages, its MC increases to \)80.

(b) The marginal cost of both firms increases.

(c) The demand curve shifts to the right.

Short Answer

Expert verified

(a) The market output will reduce, and the price will increase in Cournot equilibrium.

In Collusive equilibrium, the market output and price will remain the same.

In Bertrand equilibrium, the market output will fall, and the market price will increase.

(b) The market output will reduce, and the price will increase in Cournot equilibrium.

In Collusive equilibrium, the market output will fall, and the price will increase.

In Bertrand equilibrium, the market output will fall, and the market price will increase.

(c) The market output will increase, and the price will rise in Cournot equilibrium.

In Collusive equilibrium, the market output will increase, and the price will increase.

In Bertrand equilibrium, the market output will increase, and the market price will not change.

Step by step solution

01

Explanation for part (a)

In Cournot equilibrium, the reaction curve of firm 1 will shift inward; thus, the output will fall, and firm B will produce more,taking some share of firm A. Thus, the total market output will fall, and the price in the market will increase.

In Collusive equilibrium, as the marginal cost of firm A increases, firm A will produce zero, and all the output will produce by firm B; hence, there will be no change in market output and price.

In Bertrand equilibrium, the price is equal to price; thus, firm A price will increase, and firm B will sell at a price lower than firm A; thus, taking all the output of firm A. Hence, with the price rise, market output falls.

02

Explanation for part (b)

In Cournot equilibrium, after the increase in marginal cost, the firm's output will fall; thus, total output will fall, and the market price will increase.

In Collusive equilibrium, the market output will fall, and the price will increase as the marginal cost increases.

In Bertrand equilibrium, as the marginal cost increases, the price increases; thus, the output will fall.

03

Explanation for part (c)

After the rightward shift in the demand curve, the output produced by both firms will increase; thus, the total output will increase, and the price increases in Cournot equilibrium.

In Collusive equilibrium, the marginal revenue increases with demand; thus, both output and price will also increase.

In Bertrand equilibrium, the rise in demand will increase total output, but the marginal cost does not change; thus, the market price will not change.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

If the demand for drive-in movies is more elastic for couples than for single individuals, it will be optimal for theaters to charge one admission fee for the driver of the car and an extra fee for passengers. True or false? Explain.

Look again at Figure 11.17 (p. 438). Suppose that the marginal costs c1 and c2 were zero. Show that in this case, pure bundling, not mixed bundling, is the most profitable pricing strategy. What price should be charged for the bundle? What will the firm鈥檚 profit be?

Some years ago, an article appeared in the New York Times about IBM鈥檚 pricing policy. The previous day,IBM had announced major price cuts on most of itssmall and medium-sized computers. The article said:

IBM probably has no choice but to cut prices periodicallyto get its customers to purchase moreand lease less. If they succeed, this could makelife more difficult for IBM鈥檚 major competitors.Outright purchases of computers are needed for ever larger IBM revenues and profits, says Morgan Stanley鈥檚 Ulric Weil in his new book, InformationSystems in the 80鈥檚. Mr. Weil declares that IBM cannot revert to an emphasis on leasing.

a. Provide a brief but clear argument in support of the claim that IBM should try 鈥渢o get its customers to purchase more and lease less.鈥

b. Provide a brief but clear argument against this claim.

c. What factors determine whether leasing or selling is preferable for a company like IBM? Explain briefly.

Look again at Figure 11.12 (p. 434), which shows the reservation prices of three consumers for two goods.

Assuming that marginal production cost is zero for both goods, can the producer make the most money by selling the goods separately, by using pure bundling, or by using mixed bundling? What prices should be charged?

Many retail video stores offer two alternative plans for renting films:

鈥 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).

鈥 A straight rental fee: Pay no membership fee, but pay a higher daily rental fee (e.g., $4 per film per day).

What is the logic behind the two-part tariff in this case? Why offer the customer a choice of two plans rather than simply a two-part tariff?

See all solutions

Recommended explanations on Economics Textbooks

View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.