Lecture 5

Question 1

When two firms compete in a market for a homogeneous product, they’re both faced with..?

Answer 1

a single demand curve in the market (cournot model)

Question 2

Why is the cartel solution not stable?

Answer 2

if firm 2 is cooperating by producing at the level prescribed by the cartel solution, firm 1’s best response would be to increase its own profits by producing more than the cartel output level

Question 3

what is the free rider problem?

Answer 3

system reliability usually depends on many individuals. sometimes people shirk

Question 4

How much effort each individual will exert within a system depends upon:

Answer 4

own benefits and costs; effort exerted by others; technology that relates individual effort to outcomes

Question 5

describe total effort:

Answer 5

reliability depends on the sum of efforts exerted by the individuals

Question 6

describe weakest link

Answer 6

reliability depends on the minimum effort

Question 7

In the case of total effort, system reliability is determined by?

Answer 7

the agent with the highest benefit-cost ratio. the other agent free rides on this agent

Question 8

In the weakest link case, system reliability is

Answer 8

determined by the agent with the lowest benefit-cost ratio