LM2: The Firm and Market Structures

Question 1

What are the characteristics for the following in Perfect competition?

Number of sellers
Entry and exit barriers
Product differentiation
Pricing power
Other unique coyxes

Answer 1

Many firms, Very low, Identical products, None -> Price takers, Each firm faces a perfectly elastic demand curve and all firms make normal profits in the long run

Question 2

What are the characteristics for the following in Monopolistic competition?

Number of sellers
Entry and exit barriers
Product differentiation
Pricing power
Other unique coyxes

Answer 2

Question 2

What are the characteristics for the following in an Oligopoly?

Number of sellers
Entry and exit barriers
Product differentiation
Pricing power
Other unique coyxes

Answer 2

Question 2

What are the characteristics for the following in an Monopoly?

Number of sellers
Entry and exit barriers
Product differentiation
Pricing power
Other unique coyxes

Question 2

Describe the Kinked demand curve, state which market it is found in and what is its key assumption?

Answer 2

Oligopoly and key assumption is that firms will follow price movements down but not up

Question 3

What is the Cournot assumption?

Answer 3

The assumption of the Cournot model is that a firm will embrace another’s output decisions in selecting its profit-maximizing output but that decision is fixed.

This means that each firm is naively conjecturing that should either one of them alter their output decisions, the other will not react.

Question 4

What is the Nash equilibrium?

Answer 4

is a game theory concept that determines the optimal solution in a non-cooperative game in which each player lacks any incentive to change his/her initial strategy. Under the Nash equilibrium, a player does not gain anything from deviating from their initially chosen strategy, assuming the other players also keep their strategies unchanged. A game may include multiple Nash equilibria or none of them.

Question 5

What is the Stackelberg competition model?

Answer 5

describes an oligopoly market model based on a non-cooperative strategic game where one firm (the “leader”) moves first and decides how much to produce, while all other firms (the “followers”) decide how much to produce afterwards.