ECON 180 - Regulation and Antitrust Policy
Drake University, Spring 2015
William M. Boal

Course page: www.cbpa.drake.edu/econ/boal/180
Blackboard: bb.drake.edu
Email: william.boal@drake.edu

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]

  1. Strategies are "low price" and "high price." See below.
  2. Payoffs are profits. See below.
  3. Firm A's best reply is "low price."
  4. Firm B's best reply is "high price."
  5. 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 $10 million
Firm A gets $15 million
Firm B gets $10 million

(2) [Cournot duopoly: 35 pts]

  1. RevA = 14 qA - (qA2/20) - (qAqB/20).
  2. MRA = 14 - (2qA/20) - (qB/20).
  3. qA* = 120 - (qB/2).
  4. qA* = 80.
  5. Q* = 160, P* = $6.
  6. L = 2/3.
  7. Social deadweight loss = $160.

(3) [Joint profit maximization: 25 pts]

  1. MR = 14 - (Q/10).
  2. Q = 120.
  3. P = $8.
  4. L = 3/4.
  5. Social deadweight loss = $360.

Critical thinking [10 pts]

  1. 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.
  2. 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]

  1. Strategies are "angular" and "round." See below.
  2. Payoffs are profits. See below.
  3. Firm A's best reply is "angular."
  4. Firm B's best reply is "amgi;ar."
  5. 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]

  1. RevA = 10 qA - (qA2/100) - (qAqB/100).
  2. MRA = 10 - (2qA/100) - (qB/100).
  3. qA* = 300 - (qB/2).
  4. qA* = 200.
  5. Q* = 400, P* = $6.
  6. L = 1/3.
  7. Social deadweight loss = $200.

(3) [Joint profit maximization: 25 pts]

  1. MR = 10 - (Q/50).
  2. Q = 300.
  3. P = $7.
  4. L = 3/7.
  5. Social deadweight loss = $450.

Critical thinking [8 pts]

[end of answer key]