Chapter 9

Question 1

Sweezy Oligopoly

Answer 1

1. There are few firms in the market serving many consumers.
2. The firms produce differentiated products.
3. Each firm believes rivals will cut their prices in response to a price reduction
   but will not raise their prices in response to a price increase.
4. Barriers to entry exist

Question 2

Cournot Oligopoly

Answer 2

1. There are few firms in the market serving many consumers.
2. The firms produce either differentiated or homogeneous products.
3. Each firm believes rivals will hold their output constant if it changes its
   output.
4. Barriers to entry exist.

Question 3

best-response
(or reaction)
function

Answer 3

A function that
defines the profitmaximizing
level
of output for a firm
for given output
levels of another
firm.

Question 4

Cornout Solution: Not Rival

Answer 4

a-Cf
——- - 1/2QR
2b

Question 5

Cornout Solution:Rival

Answer 5

a-Cr
——– - 1/2Qf
2b

Question 6

Stackleberg Shortcut

Answer 6

  2b

Question 7

Why is Bertrand undesirable?

Answer 7

It leads

to zero economic profits even if there are only two firms in the market.

Question 8

Why is Bertrand undesirable?From the viewpoint of the manager

Why is it desirable from the viewpoint of the consumer?

Answer 8

-It leads
to zero economic profits even if there are only two firms in the market.

-It leads to precisely the
same outcome as a perfectly competitive market.

Question 9

What’s the overall situation in Bertand?

Answer 9

Bertrand oligopoly and homogeneous products lead

to a situation where each firm charges marginal cost and economic profits are zero.

Question 10

Stackelberg Oligopoly

Answer 10

1. There are few firms serving many consumers.
2. The firms produce either differentiated or homogeneous products.
3. A single firm (the leader) chooses an output before all other firms choose
   their outputs.
4. All other firms (the followers) take as given the output of the leader and
   choose outputs that maximize profits given the leader’s output.
5. Barriers to entry exist.

Question 11

Bertrand Oligopoly

Answer 11

1. There are few firms in the market serving many consumers.
2. The firms produce identical products at a constant marginal cost.
3. Firms engage in price competition and react optimally to prices charged by
   competitors.
4. Consumers have perfect information and there are no transaction costs.
5. Barriers to entry exist.