Question

Vanessa is an oligopolist who believes that if she decreases her price, her competitors will not follow and decrease their prices. Draw a graph showing Vanessa's firm in short-run equilibrium, using demand, marginal cost, marginal revenue, and average-total-cost curves. Indicate the price and quantity Vanessa will produce in short-run equilibrium, and show a price decrease that results in Vanessa's firm still earning positive economic profits

Answer 1

Ans: In an oligopoly situation, a small number of firms have an effective control over the prices and production of products with an informal agreement.

Thus, it is extremely rare where a company can earn profits with a price fluctuation, as other competitors would right away decrease their prices if one of them does, in order to cutthroat the price benefits, and wouldn't dare to increase the prices, due to the fear of losing the customers and incurring losses.

But there is a possibility, where in a firm may drop the prices knowing that the others wont,

This can take place due to several reasons, and with this a situation of short run equilibrium with positive economic profits is created.

Following illustration gives a fair overview of the given scenario:

Thus the following explains us how even with a decrease in price Vanessa's firm can still earn positive economic profits.