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    (Chapter 10) Models of Duopoly and Oligopoly

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    april
    The document summarizes exercises from Chapter 10 of Managerial Economics on models of duopoly and oligopoly. It provides examples of calculating equilibrium outputs, prices, and profits for industries with 2 firms (duopoly), many firms (oligopoly), and a single dominant firm using different demand and cost functions. The key results are: 1) For a duopoly, the equilibrium output of each firm is 16.67 units, price is $38.33, and profit is $361.07. 2) For an oligopoly of 10 firms, the equilibrium output of each firm is 8 units and total industry output is 80 units. 3) For a single dominant firm, the monopoly output is

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    (Chapter 10) Models of Duopoly and Oligopoly

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    april
    226 views4 pages
    The document summarizes exercises from Chapter 10 of Managerial Economics on models of duopoly and oligopoly. It provides examples of calculating equilibrium outputs, prices, and profits for industries with 2 firms (duopoly), many firms (oligopoly), and a single dominant firm using different demand and cost functions. The key results are: 1) For a duopoly, the equilibrium output of each firm is 16.67 units, price is $38.33, and profit is $361.07. 2) For an oligopoly of 10 firms, the equilibrium output of each firm is 8 units and total industry output is 80 units. 3) For a single dominant firm, the monopoly output is

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    The document summarizes exercises from Chapter 10 of Managerial Economics on models of duopoly and oligopoly. It provides examples of calculating equilibrium outputs, prices, and profits for industries with 2 firms (duopoly), many firms (oligopoly), and a single dominant firm using different demand and cost functions. The key results are: 1) For a duopoly, the equilibrium output of each firm is 16.67 units, price is $38.33, and profit is $361.07. 2) For an oligopoly of 10 firms, the equilibrium output of each firm is 8 units and total industry output is 80 units. 3) For a single dominant firm, the monopoly output is

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    226 views4 pages

    (Chapter 10) Models of Duopoly and Oligopoly

    Uploaded by

    april
    The document summarizes exercises from Chapter 10 of Managerial Economics on models of duopoly and oligopoly. It provides examples of calculating equilibrium outputs, prices, and profits for industries with 2 firms (duopoly), many firms (oligopoly), and a single dominant firm using different demand and cost functions. The key results are: 1) For a duopoly, the equilibrium output of each firm is 16.67 units, price is $38.33, and profit is $361.07. 2) For an oligopoly of 10 firms, the equilibrium output of each firm is 8 units and total industry output is 80 units. 3) For a single dominant firm, the monopoly output is

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 4

    Managerial Economics:

    Models of Duopoly and Oligopoly


    (Chapter 10)

    CHAPTER EXERCISES

    10.1 Suppose that the demand function for an industry’s output is P =55 - Q. Suppose, further, that the
    industry comprises two firms with constant average total and marginal cost, ATC = MC = 5. Finally,
    assume that each firm in the industry believes that its rival will not alter its output when determining how
    much to produce.

    Give the equilibrium price, quantity, and profit of each firm in the industry. (Hint: Use the Cournot
    duopoly model to analyze the situation.)
    P = 55 – Q
    P = 55 – (Q1 +Q2) P = 55 – (Q1 +Q2)
    TR1 =[55 – (Q1 +Q2)] Q1 TR2 =[55 – (Q1 +Q2) Q2]
    TR1 = 55Q1 – Q12 - Q1 Q2 = 55Q2 – Q1Q2 -
    ԉ1 = 55Q1 – Q12 - Q1Q2 – 5 Q1 ԉ1 =55Q2 – Q1Q2 - – 5 Q1
    = 55 – 2Q1 – Q2 - 5 = 55 – Q2 – 2Q2 - 5
    2Q1 = 50 - Q2 2Q2 = 50 - Q1
    Q1 = 25 – 0.5Q2 Q2 = 25 – 0.5Q1

    Q1 = 25 – 0.5Q2
    Q2 = 25 – 0.5Q1

    For quantity of each firm:

    Q1 = 25 – 0.5 (25 – 0.5Q1)


    Q1 = 25 – 12.5 + 0.25Q1 Q2 = 25 – 0.5Q1
    Q1 = 12.5 + 0.25Q1 Q2 = 25 – 0.5(16.67)
    0.75Q1 = 12.5 Q2 = 16.67
    Q1 = 16.67

    For quantity of each firm:


    ԉ1 = 55(16.67) – (16.67)2 – (16.67)(16.67) = 361.07
    ԉ2 = 55(16.67) – (16.67)2 – (16.67)(16.67) = 361.07

    For equilibrium price:


    P= 55 – Q
    = 55 - 16.67
    = 38.33
    Managerial Economics:
    Models of Duopoly and Oligopoly
    (Chapter 10)

    b.Assuming that this is a perfectly competitive industry, give the price and output level.

    For output level:


    Q1 = 25 – 0.5 (25 – 0.5Q1)
    Q1 = 25 – 12.5 + 0.25Q1
    Q1 = 12.5 + 0.25Q1
    0.75Q1 = 12.5
    Q1 = 16.67
    For price:
    P*= 55 – 1 (16.67 + 16.67)
    P*= 21.66

    c.Suppose that there are 10 firms in this industry. What is output of the industry? What is the output
    level of each firm?
    P = 55 – X - Q1
    TR = (100 – X - Q1) Q1
    TR = 100Q1 - X Q1 - Q12
    MR = = 100 – X - 2Q1

    MR = MC
    100 – X - 2Q1 = 5
    2Q1 = 95 – 2X
    Q1 = 47.5 – 0.5X
    X = 10Q1
    Q1 = 47.5 – 0.5 (10Q1)
    Q1 = 4.75 - 5Q1
    6Q1 = 47.5
    Q1 = 7.917 or 8
    The output level of each firm is 8 units.

    Total output = 10 x 8 = 80
    Therefore, the output of the industry is 80 units.

    D.Suppose that the industry is dominated by a single profit-maximizing firm. What is the firm’s output?
    How much will the firm charge for its product? What is the firm’s profit?
    MC = 5
    P= 55 – Q
    TR = (55 – Q)Q
    = 55Q -
    MR = 55 – 2Q
    Managerial Economics:
    Models of Duopoly and Oligopoly
    (Chapter 10)

    For firm’s charge for its product:


    P= 55 -25
    P= 30
    For firm’s output:
    P = MR = MC For firm’s profit:
    55 – 2Q = 5 = 30 (25) – 5 (25)
    Q = 50 / 2Q = 625
    Q = 25

    10.2 Consider the following market demand and cost equations for two firms in a duopolistic industry.
    = 100 - 5(Q1 +Q2)
    TC1 = 5Q1
    TC2 = 5Q2
    Determine each firm’s reaction function.

    For firm 1:
    TR1 = 100Q1 – 5 - 5Q1Q2
    ԉ1 = 100Q1 – 5 - 5Q1Q2 - 5Q1 = 95Q1 - 5 - 5Q1Q2
    = 95 – 10Q1 – 5Q2 = 0
    Q1 = 9.5 – 0.2 Q2

    For firm 2:
    TR2 = 100Q2 –5Q1Q2 + 5
    ԉ2 = 100Q2 - 5Q1Q2– 5 - 5Q2 = 95Q2 - 5Q1Q2 - 5
    = 95 – 5Q1 – 10Q2 = 0
    Q2 = 9.5 – 0.2 Q1

    Give the equilibrium price and profit-maximizing output for each firm, and each firm’s maximum profit.
    Profit-maximizing output:
    Q1 = 9.5 – 0.2 Q2
    Q2 = 9.5/ 1.20
    Q2 = 7.92
    Q1 = 9.5 – 0.2 (7.92)
    Q1 = 7.92
    Managerial Economics:
    Models of Duopoly and Oligopoly
    (Chapter 10)

    Profit
    = 95 (7.92) – 5 (7.92)2 - 5 (7.92) (7.92) = 125
    = 95 (7.92) – 5 (7.92)2 - 5 (7.92) (7.92) = 125

    Equilibrium Price:
    P* = 100 – 5 (Q1 + Q2)
    P* = 100 – 5 (7.92 + 7.92)
    P* = 20.8

    10.3 Suppose that the inverse market demand equation for the homogeneous output of a duopolistic
    industry is = A-(Q1 +Q2) and that the two firms’ cost equations are
    TC1=B
    TC2 =C
    where A, B, and C are positive constants. What is the profit-maximizing level of output for each firm?

    P = A – (Q1 +Q2)
    P = A – 1(Q1 +Q2)
    TR1 = AQ2 – 1Q12- 1Q1Q2
    ԉ1 = AQ1 – 1Q12- 1Q1Q2 - 2Q1
    = (A-2) Q1 - 1Q12- 1Q1Q2

    TR2 = AQ2 – 1Q1Q2- 1Q12


    ԉ2 = AQ2 – 1Q1Q2- 1Q1Q2 - 2Q2
    = (A-2) Q2 - 1Q1Q2 - 1Q22
    = (A-2) - 1Q1-2Q2= 0

    Q1 = -0.5Q2
    Q2 = -0.5Q1

    Profit-maximizing level of output for each firm

    Q1* = Q2* =

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