Question

1. According to economic theory, price fixing through a cartel arrangement is an undesirable outcome because:

	a.	It leads to dead weight losses that could be avoided.
	b.	It restricts the quantity traded in the market.
	c.	Consumers have to pay a price that is higher than what they would normally pay in absence of the cartel arrangement.
	d.	All of the above.

2.In the price-leadership model covered in class:

	a.	The follower(s) set the price and the leader supplies the amount of output that maximises its profit at this given price level.
	b.	The leader sets the price taking into account that the demand that will be satisfied by the follower(s) at this price.
	c.	The leader maximises its profit subject to the follower’s or followers’ reaction function(s).
	d.	The solution contradicts the Law of Demand.

3.Bertrand’s price competition (implicitly or explicitly) assumes that:

	a.	Firms have some degree of market power and are not “small”.
	b.	There is intense price competition, in the sense that consumers can switch from one supplier to another at no, or a very low, switching cost.
	c.	Collusion is not possible.
	d.	All of the above.

4.In Stackelberg’s model:

	a.	“The follower” could be interpreted as a group of followers, each of which is a price-taker.
	b.	The follower takes into account how the leader will react to its decisions.
	c.	The leader maximises its profit subject to the follower’s reaction function.
	d.	All of the above.

5.In a Cournot’s equilibrium:

	a.	Firms’ profit functions are independent from what other firms do.
	b.	A firm makes a profit-maximising decision and some other firm or firms mimic this decision.
	c.	Each firm in the market makes an output decision that is a best-response to what the other firm(s) in the market do.
	d.	There is a quantity-leader and a quantity-follower.

Answer 1

1. D. All of the above.

Cartel are a group formed be some oligopolistic firms. They produce less than the desired competitive quantity and sell it for higher prices. This reduces quantity supplied, creates deadweight loss and consumers have to pay higher price.

2. b.

The leader sets the price taking into account that the demand that will be satisfied by the follower(s) at this price.

In this model price leader sets the price and in order to stay in the market and maintain their market share the followers have to follow the lead.

3.d. All of the above

In this model the assumption are that there are two firms which are not ready to form collusion at any cost and believes that other won't lower its price and in this believe only, both the firms keeps on reducing the price of their produce until price =marginal cost. The consumer have no preference for the firms but only have for the lower price.

4.

d.

All of the above.

The leading firm sets the trend the follower follows and then leader observes its reaction and based on that tries to maximise it's own profit.

5.

c.

Each firm in the market makes an output decision that is a best-response to what the other firm(s) in the market do.

In this model the market price is set such that the demand = total quantity produced by all firms all together. A firm observes the actions of one firm, see how it affects the demand, calculates the residual demand and then acts as a monopoly.