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Chapter 10: Q.4 (page 252)

Sometimes oligopolies in the same industry are very different in size. Suppose we have a duopoly where one firm

(Firm A) is large and the other firm (Firm B) is small, as the prisoner’s dilemma box in Table 10.4 shows.


Firm B colludes with firm AFirm B cheats by selling more output
Firm A colludes with firm B
A gets \(1000,B gets \)100A gets \(800, B gets \)200
Firm A cheats by selling more outputA gets \(1050, B gets\)50A gets \(500, B gets \)20

Assuming that both firms know the payoffs, what is the likely outcome in this case?

Short Answer

Expert verified

Because of the prisoner’s dilemma, they will compete and cheat. When both firms cheat and lower their prices, firm A will earn $500 and firm B will get $20.

Step by step solution

01

Step 1. Definition

An oligopoly is a market with little competition in which a few producers control the majority of the market share and produce items that are identical or homogeneous.

02

Step 2. Explanation

According to the question both firm A and firm B are in duopoly so they are the only sellers and firm A is larger and firm B is small. Because of the prisoner’s dilemma, they will compete and cheat.

When both firms cheat and lower their prices, firm A will earn $500 and firm B will get $20

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Most popular questions from this chapter

Jane and Bill are apprehended for a bank robbery. They are taken into separate rooms and questioned by the police about their involvement in the crime. The police tell them each that if they confess and turn the other person in, they will receive a lighter sentence. If they both confess, they will be each be sentenced to 30years. If neither confesses, they will each receive a 20-year sentence. If only one confesses, the confessor will receive data-custom-editor="chemistry" 15years and the one who stayed silent will receive 35years. Table 10.7below represents the choices available to Jane and Bill. If Jane trusts Bill to stay silent, what should she do? If Jane thinks that Bill will confess, what should she do? Does Jane have a dominant strategy? Does Bill have a dominant strategy? A = Confess; B = Stay Silent. (Each results entry lists Jane’s sentence first (in years), and Bill's sentence second.)

Does each individual in a prisoner’s dilemma benefit more from cooperation or from pursuing self-interest? Explain briefly.

Continuing with the scenario in question 1, in the long run, the positive economic profits that the monopolistic competitor earns will attract a response either from existing firms in the industry or firms outside. As those firms capture the original firm’s profit, what will happen to the original firm’s profit-maximizing price and output levels?

Would you expect the kinked demand curve to be more extreme (like a right angle) or less extreme (like a normal demand curve) if each firm in the cartel produces a near-identical product like OPEC and petroleum? What if each firm produces a somewhat different products? Explain your reasoning.

Andrea’s Day Spa began to offer a relaxing

aromatherapy treatment. The firm asks you how much to charge to maximize profits. The first two columns in Table 10.5provide the price and quantity for the demand curve for treatments. The third column shows its total costs. For each level of output, calculate total revenue, marginal revenue, average cost, and marginal cost. What is the profit-maximizing level of output for the treatments and how much will the firm earn in profits?

Price Quantity TC
\(25.00 0 \)130
\(24.00 10 \)275
\(23.00 20\)435
\(22.50 30 \)610
\(22.00 40 \)800
\(21.60 50 \)1,005
\(21.20 60 \)1,225
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