Prerequisites

Question 1

How much market share does a pure monopoly hold?

Answer 1

100%

Question 2

How much market share does a dominant firm hold

Answer 2

50% - 100%

Question 3

most real world markets are ______

Answer 3

oligopolies

Question 4

the lower the price elasticity, the ____ the price-cost margin should be set by a monopolist

Answer 4

greater

Question 5

is defining a monopoly based on market power effective?

Answer 5

no, it is likely to lead to problems of market definition

Question 6

one firm increasing prices is likely to influence another firms profit in which market structure?

Answer 6

oligopoly

Question 7

what do Betrand and Cournott Models characterise?

Answer 7

the process of interdependent strategic decision making under oligopoly

Question 8

What market structure does the Betrand Model use?

Answer 8

Duopoly

Question 9

What are the assumptions in the Bertrand Model?

Answer 9

Firms have:
1. homogeneous goods in the market (perfect substitutes)
2. Same (constant) MC
3. they set prices simultaneously without knowing the price set by the rival
4. the demand is linear

Question 10

If Firm 1 expects Firm 2 to price below MC, firm 1’s optimal choice is to…

Answer 10

Set prices higher than firm 2 (P = MC)

Question 11

If Firm 1 expects Firm 2 to set prices greater than MC but lower than monopoly pricing, Firm 1 should…

Answer 11

Set prices lower than Firm 2

Question 12

If Firm 1 expects Firm 2 to set prices greater than monopoly pricing, Firm 1 should…

Answer 12

Set prices equal to monopoly pricing

Question 13

What is a Nash Equilibrium?

Answer 13

Where both firms set prices equal to MC, representing a stable outcome where neither firm can improve its profits by unilaterally changing its price

Question 14

What is another word for the Firms Reaction Curve?

Answer 14

Best Response Function

Question 15

What does the reaction curve show?

Answer 15

a firms optimal pricing strategy in response to various prices set by the rival firm

Question 16

What market outcome does the Bertrand Model suggest?

Answer 16

similar to perfect competition

Question 17

What are the assumptions of Cournot model

Answer 17

1. 2 firms compete for a homogenous product
2. each firm simultaneously chooses the quantity it wants to produce
3. market price is determined where total demand equals total quantity produced
4. constant MC

Question 18

What is the equation for a firms profit in the Cournot model

Answer 18

profit of firm 1 = Q1 x P (Q1 + Q2) - C

Question 19

What is the overarching goals in the Bertrand and Cournot Models

Answer 19

Derive the equilibrium of the model

Question 20

What are the 2 steps to derive the equilibrium of the Cournot model?

Answer 20

1. derive each firms optimal choice (reaction curve) given what the rival firm does
2. put the reaction curves together and find a mutually consistent combination of actions and conjectures

Question 21

What does residual demand refer to in the Cournot model

Answer 21

Demand that remains for a firm after accounting for the quantity produced by its competitors. So the relationship between the quantity produced by one firm and the price it can sell its product at, given the quantity produced by its competitors.

Question 22

What should firm 1’s optimal output be if it knows firm 2’s q = 0?

Answer 22

Choose the monopoly quantity

Question 23

What should firm 1’s optimal quantity be if firm 2 were to choose the quantity corresponding to perfect competition

Answer 23

Choose to produce nothing

Question 24

Why can we assume that firm 1’s reaction function is the same as firm 2’s in the Cournot model?

Answer 24

Both firms have the same cost function so reaction functions are symmetric

Question 25

Where is the equilibrium point in the cournot model given

Answer 25

intersection of the reaction curves

Question 26

Total output under Cournot (and general oligpolies) is ___ than that under monopoly and _____ than that under perfect competition

Answer 26

a) greater
b) lower

Question 27

Cournot model predicts price under duopoly is ___ than monopoly price but ____ under perfect competition

Answer 27

a) lower
b) greater

Question 28

True or false
The betrand model predicts that duopoly competition is sufficient to drive prices down to MC level

Answer 28

true lol

Question 29

What kind of industries are better described using cournot models?

Answer 29

Ones where capacity or output is a long run decision with respect to prices (its easier to adjust prices levels than output)

Question 30

If capacity and output can be easily adjusted, then the___ model is a better approximation of duopoly competition

Answer 30

Bertrand

Question 31

Most real world industries seem to be closer to the case where ____ is difficult to adjust so the ___ model

Answer 31

a) Output
b) Cournot

Question 32

What is the definition of comparative statics

Answer 32

we compare two equilibria, with two sets of exogenous conditions, and predict how a shift in one variable will influence the other variables.

Question 33

What does the firms reaction function depend on?

Answer 33

Marginal Cost

Question 34

An increase in MC implies a ____ shift of the reaction curve

Answer 34

downward

Question 35

A devaluation of a currency will lead to an ___ shift of the reaction curve

Answer 35

upward

Question 36

In practise is cournot closer to perfect competition or monopoly?

Answer 36

Perfect competition