Exploring Economics
8th Edition
ISBN: 9781544336329
Author: Robert L. Sexton
Publisher: SAGE Publications, Inc
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Chapter 15, Problem 16P
To determine
To find:
The probability of everyone in the class getting an A in the course.
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Oligopoly is a market structure in which only a few enterprises can prevent the others from
exerting considerable influence. The concentration ratio is a measure of the largest companies'
market share. One firm is a monopoly, two firms are a duopoly, and two or more firms are an
oligopoly. The number of firms in an oligopoly has no definite upper limit, but it must be small
enough that the activities of one firm have a considerable impact on the others.
Steel corporations, oil companies, railways, tyre companies, grocery store chains, and cellular
providers have all been oligopolies in the past. An oligopoly, according to economic and legal
concerns, can stifle new entrants, limit innovation, and raise prices, all of which affect
consumers. Instead of collecting prices from the market, firms in an oligopoly determine pricing,
whether collectively (in a cartel) or under the leadership of a single enterprise. As a result, profit
margins are higher than in a more competitive market.…
Corporate lawsuits may sometimes be signalling games. Here is one example: In 2003, AT&T (a large US telephone company) filed a suit against eBay, alleging that its electronic payment systems (PayPal etc) infringed on AT&T’s 1994 patent on “mediation of transactions by communications system”.
When the suit was filed, as in most patent-infringement suits, eBay can offer to settle with AT&T without going to court. If AT&T accepts eBay’s settlement offer, there will be no trial. If AT&T rejects eBay’s settlement offer, the outcome will be determined by court.
Suppose that AT&T is suing for $300 million (the exact number was not publicly available), also assume that if the case goes to trial, the two parties will incur court costs of $10 million each.
Because eBay is actually in the business of processing electronic payments, we might think that eBay knows more than AT&T does about its probability of winning the case. For simplicity, let’s assume that eBay knows…
After graduating, you start work as a management consultant. You are paid $210 per hour. One morning before work, you decide to buy a new car.
You know the exact model you want, and you know that in your area the price ranges from $39,000 to $41,000, with the average price you can expect
to pay being $40,000. You can choose among hundreds of dealers, but you don't know which dealer will give you the best price.
Time is literally money, since every hour you spend searching is an hour you don't get paid. Each visit to a dealer takes an hour. Your expected
marginal benefit of another search is the difference between the current dealer's offer and the average price.
The first dealer you go to asks $40,500 for the car. Should you accept the price or keep searching? (Keep in mind that each visit to a dealer takes an
hour.)
Keep searching.
Accept the price.
Suppose you kept searching, and the next dealer you go to asks $40,150. Do you think you should accept this price or keep searching?
O…
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- Consider two oligopolists, each choosing between a “high” and a “low” level of production. Given their choices of how much to produce, their profits will be as follows: Explain how firm B will reason that it makes sense to produce the high amount, regardless of what firm A chooses. Then explain how firm A will reason that it makes sense to produce the high amount, regardless of what firm B chooses. How might collusion assist the two firms in this case?arrow_forwardIn a market there are five firms, all have a total cost curve equal to CT = 2q. The market demand is Q = 500 - 5P. How much profit would each firm get if they collude and share the market equitably? What is the profit to each firm if they agree to collude, but one firm misleads the others charging a slightly lower price? What is the profit if all firms do not collude and compete via price?arrow_forwardSuppose that there are two lemonade stands competing with one another via Bertrand (price) competition. There are 100 potential customers who walk by the two stands each day. Each of these customers will buy lemonade from whichever stand is cheapest as long as the price is less than $1. If they charge the same price then the customer chooses randomly between the two. The marginal cost of lemonade is the $0.25 for both stands. Fixed Costs are equal to $5 for each stand. What is the Nash equilibrium price of lemonade? a. $0.25 b. $1.00 c. $0.30 d. $0.35arrow_forward
- In the Bertrand model, suppose that each firm has a marginal cost of £5 and that firm 1 sets a price of £5, which of the following a best-response for firm 2? Click all the correct answers. £5.00 £4.98 £4.99 £5.20 £5.01arrow_forwardThis case study focuses on the pay-for-viewing TV (Pay TV in short) industry in Australia. Back in 2013, Foxtel had just finished acquiring Austar, its major competitor. Foxtel was enjoying near-total dominance in the market. There were other players such as Optus TV and iiNet, however, their market shares were dwarfed by that of Foxtel. IBISWorld reported that Foxtel occupied 92.6% of the market share in 2013. Then in March 2015, Netflix Australia was launched, opening the gate for an influx of other subscription video-on-demand (SVOD) services. These new services were internet-based, which differed from Foxtel’s model of cable TV. Nevertheless, they competed fiercely for subscribers. Fast forward to the present day (October 2021), Australian consumers now have a wealth of choices of the content offered by Foxtel, Netflix, Stan, Amazon Prime, Apple TV, Disney+, Optus Sport, and the recently launched Paramount+ (launched in August 2021). Questions: Draw a firm diagram to illustrate…arrow_forwardThis case study focuses on the pay-for-viewing TV (Pay TV in short) industry in Australia. Back in 2013, Foxtel had just finished acquiring Austar, its major competitor. Foxtel was enjoying near total dominance in the market. There were other players such as Optus TV and iiNet, however, their market shares were dwarfed by that of Foxtel. IBISWorld reported that Foxtel occupied 92.6% of market share in 2013. Then in March 2015, Netflix Australia was launched, opening the gate for an influx of other subscription video-on-demand (SVOD) services. These new services were internet-based, which differed from Foxtel’s model of cable TV. Nevertheless, they competed fiercely for subscribers. Fast forward to the present day (October 2021), Australian consumers now have a wealth of choices of content offered by Foxtel, Netflix, Stan, Amazon Prime, Apple TV, Disney+, Optus Sport, and the recently launched Paramount+ (launched in August 2021). Required: Question 1. Back in 2013, which market…arrow_forward
- This case study focuses on the pay-for-viewing TV (Pay TV in short) industry in Australia. Back in 2013, Foxtel had just finished acquiring Austar, its major competitor. Foxtel was enjoying near total dominance in the market. There were other players such as Optus TV and iiNet, however, their market shares were dwarfed by that of Foxtel. IBISWorld reported that Foxtel occupied 92.6% of market share in 2013. Then in March 2015, Netflix Australia was launched, opening the gate for an influx of other subscription video-on-demand (SVOD) services. These new services were internet-based, which differed from Foxtel’s model of cable TV. Nevertheless, they competed fiercely for subscribers. Fast forward to the present day (October 2021), Australian consumers now have a wealth of choices of content offered by Foxtel, Netflix, Stan, Amazon Prime, Apple TV, Disney+, Optus Sport, and the recently launched Paramount+ (launched in August 2021). Question:arrow_forwardThe French economist Antoine Cournot developed an interesting model of competition in an oligopoly that now bears his name. In a Cournot oligopoly, all of the firms know that the total output from all firms will determine the price (based on the downward-sloping market demand curve), but they make independent and simultaneous decisions about how much output to produce. Cournot developed this model after observing how a spring water duopoly (two firms) behaved. So let’s look at a duopoly example.For each firm to decide how much to produce, it must make a guess about how much the other firm is going to produce. Also, the firms basically assume that once the other firm has decided how much to produce, it can’t really change its decision.Here’s an example. Suppose the market demand curve for gallons of fresh spring water looks like the one below and, to keep things simple, the marginal cost of spring water is zero. If Firm X believes that Firm Y is going to produce 100 gallons of spring…arrow_forwardImagine a small town in a remote area where only two residents, Maria and Miguel, own dairies that produce milk that is safe to drink. Each week Maria and Miguel work together to decide how many gallons of milk to produce. They bring milk to town and sell it at whatever price the market will bear. To keep things simple, suppose that Maria and Miguel can produce as much milk as they want without cost so that the marginal cost is zero. The weekly town demand schedule and total revenue schedule for milk is shown in the table below: Quantity (in gallons) 10 |1 O b. $12 O c. $10 d. S8 2 113 14 לן 16 17 18 19 10 11 12 Price $24 $22 $20 $18 $16 $14 $12 $10 $8 $6 $4 $2 $0 Total Revenue (and Total Profit) $0 $22 $40 $54 $64 $70 $72 $70 $64 $54 $40 $22 $0 Refer to Table 17-3. Suppose the town enacts new antitrust laws that prohibit Maria and Miguel from operating as a monopoly. What will be the price of milk once Maria and Miguel reach a Nash equilibrium? a. $14arrow_forward
- The demand for a product is Q = a - P/2. If there are 4 firms in an industry and marginal cost is MC = 20, then the price in Nash equilibrium is P = 56. What is a?arrow_forwardSuppose that two identical firms produce widgets and that they are the only firms in the market. The average and marginal cost is €60 for each firm. Price is determined by the following demand curve: P = 300 – Q where Q = Q1 + Q2. Suppose firm 1 is the leader and firm 2 is the follower. The output produced by each firm in a Stackelberg equilibrium is A. Firm 1 will produce 60 and Firm 2 will produce 120 B. Firm 1 will produce 80 and Firm 2 will produce 40 C. Firm 1 will produce 120 and Firm 2 will produce 40 D. Firm 1 will produce 120 and Firm 2 will produce 60arrow_forwardIn Chapter 1, Pride, Hughes, and Kapoor (2023) describes four types of competition that exists in the capitalist system, two of which are a monopolistic competition and an oligopoly. Based on that, answer the following question: Consider an electric utilities store and a retail store. In which of the two competitions would each fall? Explain why you placed each of the two businesses in their respective competition.arrow_forward
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