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Market Structure and Game Theory (Part 4)

The document contains a series of questions about market structure and game theory, including questions about monopoly pricing and profits, the Cournot duopoly model, Bertrand competition between airlines, and incentives for firms to lower their marginal costs in a Cournot competition setting. The questions involve calculating equilibrium prices, quantities, profits, and reaction curves under different assumptions about firm behavior and market structure.

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Srijita Ghosh
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53 views

Market Structure and Game Theory (Part 4)

The document contains a series of questions about market structure and game theory, including questions about monopoly pricing and profits, the Cournot duopoly model, Bertrand competition between airlines, and incentives for firms to lower their marginal costs in a Cournot competition setting. The questions involve calculating equilibrium prices, quantities, profits, and reaction curves under different assumptions about firm behavior and market structure.

Uploaded by

Srijita Ghosh
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Paper Name: Intermediate Microeconomics – II

Paper Code: BNHRCC410T


B.A. 4th Semester
Srijita Ghosh
Assistant Professor
Department of Economics
St. Xavier’s University, Kolkata

SrijitaGhosh_Intermediate Microeconomics –
01/18/2022 1
II_BA4thsemester
Market Structure
and
Game Theory
(Part 4)

SrijitaGhosh_Intermediate Microeconomics –
01/18/2022 2
II_BA4thsemester
A monopolist can produce at a constant average (and marginal) cost of AC =
MC = $5. It faces a market demand curve given by Q = 53 − P.

a. Calculate the profit-maximizing price and quantity for this monopolist.


Also calculate its profits.

b. Suppose a second firm enters the market. Let Q1 be the output of the
first firm and Q2 be the output of the second. Market demand is now
given by Q1 + Q2 = 53 - P Assuming that this second firm has the same
costs as the first, write the profits of each firm as functions of Q 1 and Q2 .
c. Suppose (as in the Cournot model) that each firm chooses its profit-

maximizing level of output on the assumption that its competitor’s output is

fixed. Find each firm’s “reaction curve” (i.e., the rule that gives its desired

output in terms of its competitor’s output).

d. Calculate the Cournot equilibrium (i.e., the values of Q1 and Q2 for which

each firm is doing as well as it can given its competitor’s output). What are the

resulting market price and profits of each firm?


e. Suppose there are N firms in the industry, all with the same constant marginal
cost, MC = $5. Find the Cournot equilibrium. How much will each firm produce,
what will be the market price, and how much profit will each firm earn? Also,
show that as N becomes large, the market price approaches the price that would
prevail under perfect competition.

f. Suppose Firm 1 is the Stackelberg leader (i.e., makes its output decisions
before Firm 2). Find the reaction curves that tell each firm how much to produce
in terms of the output of its competitor.

g. How much will each firm produce, and what will its profit be?
United Airlines and American Airlines both fly between Chicago and San Francisco. Their
demand curves are given by QA =1000-2PA+PU and QU=1000-2PU+PA. QA and QU stand for
the number of passengers per day for American and United, respectively. The marginal cost of
each carrier is $10 per passenger.

a) If American sets a price of $200, what is the equation of United’s demand curve and
marginal revenue curve? What is United’s profit-maximizing price when American sets a
price of $200?

b) Redo part (a) under the assumption that American sets a price of $400.

c) Derive the equations for American’s and United’s price reaction curves.

d) What is the Bertrand equilibrium in this market?


Suppose the airline industry consisted of only two firms: American and Texas Air Corp. Let the two firms have
identical cost functions, C(q) = 40q. Assume that the demand curve for the industry is given by P = 100 − Q
and that each firm expects the other to behave as a Cournot competitor.

a. Calculate the Cournot-Nash equilibrium for each firm, assuming that each chooses the output level that
maximizes its profits when taking its rival’s output as given. What are the profits of each firm?

b. What would be the equilibrium quantity if Texas Air had constant marginal and average costs of $25 and
American had constant marginal and average costs of $40?

c. Assuming that both firms have the original cost function, C(q) = 40q, how much should Texas Air be
willing to invest to lower its marginal cost from 40 to 25, assuming that American will not follow suit?
How much should American be willing to spend to reduce its marginal cost to 25, assuming that Texas
Air will have marginal costs of 25 regardless of American’s actions?

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