Introduction En Microeconomie

MICROECONOMICS II

PRACTICE SHEET IV: Oligopoly

EXERCISE 1

There are 2 farmers in a town producing millk. Both decide simultaneously how much

to produce. Inverse demand is p(q)=2000-2q. Both farmers face the same cost function:

C(q)=80000+560q.

a) Claculate and draw the reaction functions of both farmers.

b) Find the Cournot equilibrium and farmers’ profits.

c) Compare the total welfare in the Cournot equilibrium with the total welfare

created if both farmers form a cartel. Discuss the result.

EXERCISE 2

Consider a market with two firms and demand function q=100-p/3. Total cost of both

firms is TC(q)=150+2q.

a) Write each firm’s profit function. Draw it.

b) Calculate each firm’s reaction functions.

c) How much should firm A produce if it expects firm B to produce 20 units?

d) Find the cournot equilibrium.

e) Find the total welfare.

f) Assume the market we are describing is the market for courrption, and each of

the firms are political parties who produce corruption. Discuss the following

sentence: “Less competition in the political market leads to higher corruption

due to concentration. That is why bipartisan countries rank higher in

international rankings of corruption.”

EXERCISE 3

There is a duopoly wih firm 1 having constant average cost c1=2, and firm 2 with

max 0,10

.

constant average cost equal to c2=1. Demand is

(a) Assume firms compete in quantity. Calculate the reaction functions and how much

it firms produces in Cournot equilibrio. Calculate profits for each firm and for the

whole industry.

(b) Calculate Production when firm 2 is the Stackelberg leader. Comment on the

differences between profits from the previous question.

(c) If both firms agreed to form a Cartel to maximize joint profits, how much would

they produce?

EXERCISE 4

Consider the following demand function

max 0,40

, for firms YO and TU,

where

. The technology is the same for both firms and costs are

. Calculate and compare prices, quantities and profits under the following cases:

a)...