ANSWER KEY: OLIGOPOLY AND COLLUSION
Quiz 5 Version A
(1)a. (2)c. (3)d. (4)c. (5)d. (6)a. (7)c. (8)a. (9)d. (10)a.
Quiz 5 Version B
(1)a. (2)a. (3)b. (4)d. (5)c. (6)b. (7)b. (8)c. (9)a. (10)c.
Test 5 Version A
(1) [Game theory: 30 pts]
- Strategies are "low price" and "high price." See below.
- Payoffs are profits. See below.
- Firm A's best reply is "low price."
- Firm B's best reply is "high price."
- There is only one Nash equilibrium: Firm A plays "low price" and Firm B plays "low price." This is a Nash equilibrium because these strategies are best replies to each other.
| |
Firm B |
| |
Low price |
High price |
Firm A |
Low price |
Firm A gets $2 million Firm B gets $2 million |
Firm A gets $15 million Firm B gets $1 million |
High price |
Firm A gets $1 million Firm B gets $15 million |
Firm A gets $10 million Firm B gets $10 million |
(2) [Cournot duopoly: 35 pts]
- RevA = 14 qA - (qA2/20)
- (qAqB/20).
- MRA = 14 - (2qA/20) - (qB/20).
- qA* = 120 - (qB/2).
- qA* = 80.
- Q* = 160, P* = $6.
- L = 2/3.
- Social deadweight loss = $160.
(3) [Joint profit maximization: 25 pts]
- MR = 14 - (Q/10).
- Q = 120.
- P = $8.
- L = 3/4.
- Social deadweight loss = $360.
Critical thinking [10 pts]
- In asymmetric Cournot equilibrium, the firm with the higher marginal cost has the lower market share. So here, Firm #2 must have higher marginal cost.
- Use the Cournot relationship:
L = (P-MCi)/P = Si/|ε|.
Here, P = $10 and ε = -2.
For Firm 1, S1 is given as 0.60, so MC1 = $7.
For Firm 2, S2 is given as 0.40, so MC2 = $8.
Test 5 Version B
(1) [Game theory: 30 pts]
- Strategies are "angular" and "round." See below.
- Payoffs are profits. See below.
- Firm A's best reply is "angular."
- Firm B's best reply is "amgi;ar."
- There are no Nash equilibria (in pure strategies) in this game. There is no pair of strategies that are best replies to each other.
| |
Firm B |
| |
Round |
Angular |
Firm A |
Round |
Firm A gets $10 million Firm B gets $5 million |
Firm A gets $15 million Firm B gets $0 million |
Angular |
Firm A gets $15 million Firm B gets $0 million |
Firm A gets $10 million Firm B gets $5 million |
(2) [Cournot duopoly: 35 pts]
- RevA = 10 qA - (qA2/100)
- (qAqB/100).
- MRA = 10 - (2qA/100) - (qB/100).
- qA* = 300 - (qB/2).
- qA* = 200.
- Q* = 400, P* = $6.
- L = 1/3.
- Social deadweight loss = $200.
(3) [Joint profit maximization: 25 pts]
- MR = 10 - (Q/50).
- Q = 300.
- P = $7.
- L = 3/7.
- Social deadweight loss = $450.
Critical thinking [8 pts]
[end of answer key]