Question

In: Economics

Question: You are analyzing a certain oligopolist industry with of only two companies: firm A and...

Question:

You are analyzing a certain oligopolist industry with of only two companies: firm A and firm B. Both companies have a production process with constant marginal costs of $2000. Assume there are no fixed costs.

As a consequence of a change in the operating structure of firm B, their marginal cost increased to a constant amount of $2100. Firm A still produces at the same marginal cost as before.

What happens to each firm's profits and output in the new equilibrium in each of the following oligopoly markets:

  1. Cournot oligopoly
  2. Sweezy oligopoly
  3. Bertrand oligopoly

Solutions

Expert Solution

a)

Cournot Oligopoly:

In case of cournot equilibrium, rise in cost of production would cause fall in output level of firm B. Overall output level will fall. Fall in output will cause rise in price. Thus, firm B is likely to suffer the loss. While the firm A cost is same but its price has increased, so its profit is likely to rise.

b)

Sweezy Oligopoly:

There is kink in demand curve in sweezy oligopoly model, hence certain rise in level of cost would not lead to change in equilibrium output and price. There is discontinuity in Marginal revenue function.

Price will remain same , but profit of firm B will invariably fall. There will not be change in output and profits of firm A.

c)

In case of Bertrand model, firms compete on price. They tend to undercut price until it becomes to equal to MC.Differential in MC of both firm will cause exit of less efficient firm from market.

Firm B will be out of market.


Related Solutions

You are analyzing a certain oligopolist industry with of only two companies, Firm A and Firm...
You are analyzing a certain oligopolist industry with of only two companies, Firm A and Firm B. Both companies have a production process with constant marginal costs of $2000. Assume there are no fixed costs. As a consequence of a change in the operating structure of firm B, their marginal cost increased to a constant amount of $2100. Firm A still produces at the same marginal cost as before. What happens to each firm's profits and output in the new...
You are analyzing a certain oligopolist industry with of only two companies, firm A and firm...
You are analyzing a certain oligopolist industry with of only two companies, firm A and firm B. Both companies have a production process with constant marginal costs of $2000. Assume there are no fixed costs. As a consequence of a change in the operating structure of firm B, their marginal cost increased to a constant amount of $2100. Firm A still produces at the same marginal cost as before. What happens to each firm’s profits and output in the new...
You are analyzing two companies that operate in the same industry. They are both growing capital-intensive...
You are analyzing two companies that operate in the same industry. They are both growing capital-intensive manufacturing companies, Guerr Corp. and Filk Corp. A diligent reading of their annual reports reveals the following: Depreciation Method Average Depreciable Life Leases Guerr Corp. Straight line Machinery: 10 years Significant operating leases for machines extending up to 20 years in length Filk Corp. Double declining balance Machinery: 20 years All leases are capital leases You know that these accounting differences will affect the...
Question 1 Although the purely monopolistic firm is the only firm in the industry, there are...
Question 1 Although the purely monopolistic firm is the only firm in the industry, there are some restraints on a monopoly's ability to change price and profits. Whivh one of the following is not such a restraint? Select one: a. A monopolistic firm is constrained by the costs of production. b. The federal government retrict pure monopolies to making only a normal profit. c. A monopolistic firm is constrained by demand for the product. d. A monopolistic firm has competition...
Suppose firm A and firm B are the only two firms in an industry. Each firm’s...
Suppose firm A and firm B are the only two firms in an industry. Each firm’s Marginal Abatement cost functions is given by: MACa = 200-Ea MACb = 200-2Eb Also, there are four people, each with marginal damage function: MDi = 1/3Et , Where Et = Ea+Eb a) What is the uncontrolled emission levels of each firm? b) Find the aggregate MAC function c) Find the aggregate MD function d) Determine the socially optimal level of emissions ?t ∗ and...
. If you were an oligopolist and from only an economic standpoint would you want to...
. If you were an oligopolist and from only an economic standpoint would you want to act as a cartel? Why?
Firm 1 and Firm 2 are two major companies that compete in the aeronautics industry. Even...
Firm 1 and Firm 2 are two major companies that compete in the aeronautics industry. Even though there are only two major firms in the industry, competitions is intense. The competition occurs mostly in the form of cost-reducing innovation. As the result, both firms are forced to spend heavily on research and development (R&D) in a race to reduce cost. Each company has the option to select a high R&D budget or a low R&D budget. The following payoff table...
You are an industry analyst for the energy sector. You are analyzing financial reports from two...
You are an industry analyst for the energy sector. You are analyzing financial reports from two companies: Black Gold Corp. and New Energy Inc. Corporate tax for both firms is 35%. Your associate analyst has calculated and compiled in the following table, a list of important figures you need for the analysis: Black Gold Corp. New Energy Inc. EBIT $     268,800 $         112,000 Depreciation $       92,004 $           33,660 Total operating capital $  1,224,000 $         636,480 Net investment in operating capital $     612,000 $         265,200 WACC 11.85% 11.88% What...
[Industry Competition] Assume that there are only four companies in the ‘Petroleum Refining’ industry. Table below...
[Industry Competition] Assume that there are only four companies in the ‘Petroleum Refining’ industry. Table below shows their sales information. year x Chevron Exxon Mobil Royal Dutch Shell BP Total Annual Sales $241.91B $482.30B $481.70B $388.29B $1594.2B Market Shares 15.2% 30.3% 30.2% 24.4% To understand market concentration, calculate Hirschman-Herfindahl Index of this industry. Show the process how you calculate HHI. Note: 15.2% = 0.152, Your answer should be between 0 and 1. Round off your answer to the second decimal...
What does analyzing companies against their industry using ratio analysis tell us? What ratios would you...
What does analyzing companies against their industry using ratio analysis tell us? What ratios would you use to do the analysis and why?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT