Download Monopolistic Competition/Oligopoly

Monopolistic Competition and Oligopoly In-Class Examples
1. What are the characteristics of a monopolistically competitive market? What happens to the
equilibrium price and quantity of existing firms in the market if one firm enters the market
with a new improved product? Why is the demand curve facing the individual firm flatter
than the market demand curve?
2. Why is the Cournot equilibrium stable (i.e. why don’t firms have any incentive to deviate
from their output levels in equilibrium)?
3. “There is no general theory of oligopoly”. Explain this statement.
4. Suppose that Iran and Saudi Arabia are Cournot duopolists in the crude oil market and face
the following demand function: P = 100 – (Q1 + Q2) where Q1 represents Iran’s output level
and Q2 represents Saudi Arabia’s output level, and P is the per-barrel price. The marginal
revenue schedules for each country are as follows:
MR1 = 100 – 2Q1 – Q2
MR2 = 100 – 2Q2 – Q1
Each country has a marginal cost curve of the form MCi = Qi, where i = 1, 2.
a) Determine each country’s reaction function
b) Does a Cournot equilibrium exist? If so, find the outputs and prices of crude oil in the two
countries.
c) Suppose that the two countries collude and become a cartel. What will be the resulting price
and outputs for crude oil for the two countries? (Hint: the market marginal revenue is 100 –
2(Q1+Q2))
d) If collusive profits are strictly greater, is it true that these tow countries should necessarily
collude? Are there any potential pitfalls in such a collusive arrangement?
5. Historically, officials from 23 elite northeastern colleges with selective admissions policies
and high tuition met each spring to compare financial aid packages= for more than 1-0,000
common applicants. The meetings, known as “overlap”, were designed to eliminate any
differences in the financial aid packages offered by the various colleges. What would you
predict would be the effect on the net price (tuition less financial aid) paid by applicants to
the colleges participating the overlap meetings? Are there any factors that would work to
undermine the ongoing viability of the overlap practice? If so, what might these factors be?