***If the companies in an oligopoly successfully collude, the equilibrium output level is determined by _____ and the equilibrium price is determined by _____.

*MR* = *MC*; the demand curve

the demand curve; *MR* = *MC*

*P* = *MC*; the market

*MR* = *MC*; *MR* = *MC*

*MR* = *MC*; the demand curve

> This is a result of the fact that cartels behave as monopolists do.

*Which of these is TRUE in Bertrand competition with differentiated goods?

- Firms choose the quantity to produce based on the industry's total output.

- Firms do not choose their prices simultaneously.

- Firms sell identical products.

- Price-cutting won't take away all the business from the other company.

NOT Firms sell identical products.

> The question asks about the Bertrand competition of firms producing differentiated goods.

**Price-cutting won't take away all the business from the other company.**

>> When products are differentiated, the consumer views them as imperfect substitutes.

An equilibrium in which each firm is doing the best it can conditional on the actions taken by its competitors is called a(n) _____.

[fill in blank]

Nash equilibrium

> Oligopolistic firms make production decisions conditional on their competitors' actions, resulting in a Nash equilibrium.

Regardless of its source, product differentiation helps firms:

increase their incentive to undercut price.

collude and earn monopoly profits.

lower the market power of some firms.

exert more market power.

**exert more market power.**

> This is because the goods being sold are imperfect substitutes for each other, and firms can charge higher prices without losing all demand.

***Equilibrium in Bertrand competition and equilibrium in perfect competition have many common results. Which of the following is NOT the same in both models? (Assume two firms in the Bertrand market.)

- All firms in the market produce the quantity of output implied by P = MC.

- In both markets, the output of any firm is Q/n, where Q is market output and n is the number of firms in the industry.

- All firms in the market charge a price equal to marginal cost.

- Both markets require a barrier to entry to reach the equilibria.

NOT All firms in the market produce the quantity of output implied by P = MC.

> Both models have equilibria that say P = MC.

**Both markets require a barrier to entry to reach the equilibria.**

>> An oligopoly requires barriers to entry. The perfectly competitive market does not have a barrier to entry.

**In a _____, new firms will always keep joining if they can make_____.

oligopolistic industry; profit

oligopolistic industry; the same product

monopolistically competitive market; profit

monopolistically competitive market; the same product

**monopolistically competitive market; profit**

> *There are no barriers to entry in this type of market.*

This table shows an investing game. The two players can either choose to invest higher amounts of money (*H*) or lower amounts of money (*L*) to receive these payoffs. If player 1 is represented as the first number, what would the Nash equilibrium of this game be?

Player 2

High Low

Player 1 150, 150 300, 100

Player 2 100, 300 200, 200

High; Low

High; High

Low; Low

Low; High

High; High

> Both players will choose to invest a high amount of money, and neither one will want to change his or her decision given the decision of the other player, since doing so would make them worse off.

*** Calculating instability of Collusions

Entry has occurred in the housefly market. Kermit finds he has to compete with Hopkins (another frog). The market demand curve for houseflies is *Q* = 2,000 − 10*P*. The marginal cost of catching houseflies is *MC* = $40 for both firms. Neither firm has any fixed costs. Kermit naturally approaches Hopkins about forming a cartel. (Under U.S. law, the housefly market is exempt from antitrust laws.) Their goal is to maximize profits. The market equilibrium is *Q* = 800 and *P* = $120. Kermit and Hopkins agree to split production evenly at 400 units each. If Hopkins cheats and produces 100 more units of output, by how much will his profits change?

+$3,000

−$3,000

−$8,000

+$8,000

+$3,000

The profit Hopkins makes when he produces 400 units is ($120 - $40)×400 = $32,000. After Hopkins cheats, the total output would be 900 units and the price of the housefly would fall to $110. The new profit Hopkins makes is ($110 - $40)×500 = $35,000. This means that he would make more profit: $35,000 - $32,000 = $3,000.

One of the two firms in Bertrand competition with differentiated goods has a marginal revenue curve that is represented by *MR*1 = 500 – 2*P*1 + 1.5*P*2. If marginal cost was zero for both firms, what would firm 1's reaction curve be?

P1 = 250 + 0.75P2

P1 = 250

P1 = 0.75P2

P1 = 250 – 0.75P2

*P*1 = 250 + 0.75*P*2

> This can be found by setting *MR* = *MC* and solving for *P*1.

Plastico is a firm that produces plastic chairs in a monopolistically competitive market. The inverse demand curve for its product is *P* = 100 - *Q*, where *Q* is the amount of chairs in thousands produced per year and *P* is dollars per chair. This firm can produce these chairs at a constant marginal cost of $20 per chair and has no fixed costs. Their total cost is given in thousands of dollars by *TC* = 20*Q*. If there was a fixed cost, how much would it have to be for the firm to make zero economic profit?

$2,400,000

$1,600,000

$1,200,000

$0

$1,600,000

> The fixed cost must be exactly enough to cancel out the positive profit Plastico earns without the fixed cost, which is $1,600,000.

There has been more entry into the organic mosquito spray market. Luckily, BlueMoss has managed to retain its distinctive brand and differentiated product. BlueMoss can produce an organic mosquito spray at a constant marginal cost of $10 per can. The demand for its organic mosquito spray is *Q* = 2,000 − 10*P*. BlueMoss' profit-maximizing output is 950 and the price is $_______.

[fill in blank]

105

> Since the inverse demand is *P* = 200 – 0.1*Q*, the marginal revenue is *MR* = 200 – 0.2*Q*. BlueMoss will maximize its profit at the point where *MR* = *MC*. Setting those equal to each other and solving for *Q* yield 950. Substituting this back into the inverse demand equation, the corresponding price is $105.

Plastico is a firm that produces plastic chairs in a monopolistically competitive market. The inverse demand curve for its product is *P* = 100 - *Q*, where *Q* is the amount of chairs in thousands produced per year and *P* is dollars per chair. This firm can produce these chairs at a constant marginal cost of $20 per chair and has no fixed costs. Their total cost is given in thousands of dollars by *TC* = 20*Q*. What quantity will Plastico produce?

40,000

40

80,000

60,000

40,000

> Since the inverse demand is *P* = 100 - *Q*, the marginal revenue is *MR* = 100 – 2*Q*. Plastico will maximize its profit at the point where *MR* = *MC*. Setting those equal to each other and solving for *Q* yield 40, which represents 40,000 chairs.