Question

1.) In the Stackelberg model of oligopoly:

a.) each firm takes the other firm's output as constant in deciding its own output level

b.) the leader firm's output is determined at the point where demand equals price

c.) the leader firm selects its output first, taking the reactions of follower firms into account

d.) each firm decides its output based on the interaction of demand and supply

.

2.) A profit-maximizing monopoly firm that sells output in two distinct markets, A and B, will be in equilibrium when:

a.) the price in each market is equal to its marginal cost of production

b.) the marginal revenue in each market is equal to the price in that particular market

c.) the marginal revenue in each market is equal to its marginal cost of production

d.) the gap between price and marginal cost is maximized in each market

Answer 1

Since in the oligopoly there are few firms who control whole markets, therefore in this market structure firms are dependent on the action of their rival firms.

In case of stackelberg model, a leader firm determine, its output first by putting the reaction function of its rival firm into its profit function and maximize it. Hence it can be said that in the Stackelberg model of oligopoly the leader firm selects its output first, taking the reactions of follower firms into account.

Hence option c is the correct answer.

2.

When a monopoly firm sells their product into different market having different demand function, then monopoly firm maximizes the profit in each market by the following condition

MR1=MC (market 1)

MR2=MC (market 2)

Hence it can be said that a profit-maximizing monopoly firm that sells output in two distinct markets, A and B, will be in equilibrium when the marginal revenue in each market is equal to its marginal cost of production.

Hence option c is the correct answer.