Topic 3 - Markets

Question 1

Cournot Model:

Answer 1

assumes that rivals will produce a particular quantity. The oligopolist decides on their own quantity on the presumed output of its competitors.

Question 2

Bertrand Model:

Answer 2

firms set a particular price and stick with it. The oligopolists then need to set their price based on what they presume their rival’s price is.

Question 3

Kinked demand curve:

Answer 3

firms cut their price, rivals will follow to prevent themselves from losing customers. Firm increases their price, their rivals will not follow.

Question 4

Minimum Efficient Scale (MES)

Answer 4

The size at which no significant additional economies of scale can be achieved. It is when the LRAC flattens off.

Question 5

When MES is more than 100%

Answer 5

there is no possibility of competition.

Question 6

If MES is more than 50%,

Answer 6

there will not be room for more than one firm to gain full economies of scale.

Question 7

Company
Percentage Market Share
General Motors
24.1%
Ford
17.1%
Toyota
14.9%
DaimlerChrysler
14.0%
All other firms
29.9%

Answer 7

• HHI = 0.241^2 + 0.171^2 + 0.149^2 + 0.140^2 + 0.299^2

Question 8

Monopoly HHI

Answer 8

More than 0.6

Question 9

Oligopoly HHI

Answer 9

0.2-0.6

Question 10

Monopolistic competition and perfect HHI

Answer 10

usually less than 0.2