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Questions and Answers
Which characteristic is most indicative of the Chamberlin model?
Which characteristic is most indicative of the Chamberlin model?
- Many firms produce differentiated products. (correct)
- Firms engage in price competition, undercutting rivals.
- A few firms produce a homogeneous product.
- Firms strategically interact, anticipating rivals' actions.
In Chamberlin's model, what condition defines the long-run equilibrium for a firm?
In Chamberlin's model, what condition defines the long-run equilibrium for a firm?
- The demand curve is tangent to the average cost curve. (correct)
- Marginal cost equals marginal revenue and price equals average total cost.
- Economic profits are maximized.
- Firms produce at the minimum point on their average cost curve.
What is a key implication of Chamberlin's model regarding firm output?
What is a key implication of Chamberlin's model regarding firm output?
- Firms produce less than the cost-minimizing output level, leading to excess capacity. (correct)
- Firms produce beyond the point of minimum average cost, leading to overproduction.
- Firms always produce at the level that maximizes social welfare.
- Firms produce at the cost-minimizing output level.
The Cournot model is characterized by firms:
The Cournot model is characterized by firms:
What assumption do firms make about their rivals' output in the Cournot model?
What assumption do firms make about their rivals' output in the Cournot model?
In the Cournot model, as the number of firms increases, what happens to the market equilibrium?
In the Cournot model, as the number of firms increases, what happens to the market equilibrium?
What is the primary variable of competition in the Bertrand model?
What is the primary variable of competition in the Bertrand model?
What is the 'Bertrand paradox'?
What is the 'Bertrand paradox'?
Under what condition does the Bertrand equilibrium occur?
Under what condition does the Bertrand equilibrium occur?
What is the central assumption regarding rival behavior in the kinked demand curve model when a firm raises its price?
What is the central assumption regarding rival behavior in the kinked demand curve model when a firm raises its price?
Why does the marginal revenue curve have a discontinuity in the kinked demand curve model?
Why does the marginal revenue curve have a discontinuity in the kinked demand curve model?
What does the kinked demand curve model primarily explain?
What does the kinked demand curve model primarily explain?
Which of the following is a key feature of the Stackelberg model?
Which of the following is a key feature of the Stackelberg model?
In the Stackelberg model, how does the leader determine its optimal output level?
In the Stackelberg model, how does the leader determine its optimal output level?
What is a predicted outcome of the Stackelberg model compared to the Cournot model?
What is a predicted outcome of the Stackelberg model compared to the Cournot model?
What is the primary difference between the Cournot and Bertrand models?
What is the primary difference between the Cournot and Bertrand models?
Which of the following models is best suited to explain price wars?
Which of the following models is best suited to explain price wars?
If firms in an oligopoly market consistently match price decreases but not price increases, which model best explains this behavior?
If firms in an oligopoly market consistently match price decreases but not price increases, which model best explains this behavior?
In which market structure is strategic interaction among firms most critical to consider?
In which market structure is strategic interaction among firms most critical to consider?
Which model assumes that firms recognize their impact on market price, considering the demand curve they face?
Which model assumes that firms recognize their impact on market price, considering the demand curve they face?
Suppose two firms in a Cournot duopoly face a market demand curve of $P = 100 - Q$, where $Q = q_1 + q_2$. Both firms have a constant marginal cost of $MC = 20$. What is firm 1's reaction function?
Suppose two firms in a Cournot duopoly face a market demand curve of $P = 100 - Q$, where $Q = q_1 + q_2$. Both firms have a constant marginal cost of $MC = 20$. What is firm 1's reaction function?
Consider a Stackelberg duopoly where firm 1 is the leader and firm 2 is the follower. Market demand is given by $P = 150 - Q$. Firm 1's marginal cost is $MC_1 = 10$, and Firm 2's marginal cost is $MC_2 = 20$. What is the output level of the leader firm (firm 1)?
Consider a Stackelberg duopoly where firm 1 is the leader and firm 2 is the follower. Market demand is given by $P = 150 - Q$. Firm 1's marginal cost is $MC_1 = 10$, and Firm 2's marginal cost is $MC_2 = 20$. What is the output level of the leader firm (firm 1)?
Which model predicts an outcome equivalent to perfect competition, even with only a few firms?
Which model predicts an outcome equivalent to perfect competition, even with only a few firms?
In a Bertrand duopoly, both firms have a constant marginal cost of $10. If firm 1 sets its price at $12, what is the best response for firm 2?
In a Bertrand duopoly, both firms have a constant marginal cost of $10. If firm 1 sets its price at $12, what is the best response for firm 2?
Consider two firms in a Cournot duopoly. Market demand is $P = 300 - 2Q$, where $Q = q_1 + q_2$. Firm 1's marginal cost is $MC_1 = 30$ and Firm 2's marginal cost is $MC_2 = 60$. What is the Cournot equilibrium quantity for firm 1?
Consider two firms in a Cournot duopoly. Market demand is $P = 300 - 2Q$, where $Q = q_1 + q_2$. Firm 1's marginal cost is $MC_1 = 30$ and Firm 2's marginal cost is $MC_2 = 60$. What is the Cournot equilibrium quantity for firm 1?
In a Stackelberg model, what critical information does the leader possess that the follower does not?
In a Stackelberg model, what critical information does the leader possess that the follower does not?
Suppose a monopolist faces a demand curve $P = 100 - Q$ and has a constant marginal cost of $20. What would be the consumer surplus under perfect competition?
Suppose a monopolist faces a demand curve $P = 100 - Q$ and has a constant marginal cost of $20. What would be the consumer surplus under perfect competition?
Which model would be most appropriate for analyzing the behavior of OPEC member countries setting oil production quotas?
Which model would be most appropriate for analyzing the behavior of OPEC member countries setting oil production quotas?
Flashcards
Chamberlin Model
Chamberlin Model
Many firms producing differentiated products, acting independently with free entry/exit. Firms maximize profits where MC=MR, leading to excess capacity in the long run.
Cournot Model
Cournot Model
Oligopoly model where a small number of firms producing a homogeneous product choose output levels simultaneously and independently, assuming rivals' output is fixed.
Bertrand Model
Bertrand Model
Oligopoly model where a small number of firms producing a homogeneous product choose prices simultaneously, assuming rivals' prices are fixed. Consumers buy from the lowest price. Equilibrium occurs when price equals marginal cost.
Kinked Demand Curve Model
Kinked Demand Curve Model
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Stackelberg Model
Stackelberg Model
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Excess Capacity
Excess Capacity
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Reaction Function
Reaction Function
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Nash Equilibrium in Cournot
Nash Equilibrium in Cournot
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Bertrand Paradox
Bertrand Paradox
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Price Rigidity
Price Rigidity
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Discontinuity in Marginal Revenue
Discontinuity in Marginal Revenue
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Leader Firm
Leader Firm
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Follower Firm
Follower Firm
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Study Notes
- Chamberlin, Cournot, Bertrand, Kinked Demand Curve, and Stackelberg models explain firm behavior in imperfectly competitive markets under oligopoly
Chamberlin Model
- Edward Chamberlin developed this model of monopolistic competition
- Many firms produce differentiated products within the market
- Firms operate independently, disregarding any actions from competitors
- Firms can freely enter and exit the market
- Firms see a downward-sloping demand curve
- Firms maximize profits where marginal cost equals marginal revenue
- Economic profits are possible in the short run
- Due to new entrants, economic profits are eliminated in the long run
- Long-run equilibrium is determined by the tangency of the demand curve and the average cost curve
- Predicts excess capacity
- Firms produce less than the level that minimizes costs
Cournot Model
- Augustin Cournot developed the Cournot model of oligopoly
- It is a quantity competition model
- A small number of firms produces a homogeneous product
- Firms act independently of each other
- Firms select output levels simultaneously
- Each firm assumes its rivals' output levels are fixed
- Each firm's reaction function indicates its optimal output level, given rivals' output levels
- The Cournot equilibrium occurs at the intersection of firms' reaction functions
- The Cournot equilibrium is also a Nash equilibrium
- No firm can increase profit by unilaterally changing its output level in a Nash equilibrium
- Market output will be greater than the monopoly output level but less than the perfectly competitive level
- Market price will be less than the monopoly price but greater than the perfectly competitive price
- As the number of firms increases, the Cournot equilibrium approaches the perfectly competitive equilibrium
Bertrand Model
- Joseph Bertrand developed the Bertrand model of oligopoly
- It is a price competition model
- A small number of firms produce a homogeneous product
- Firms operate independently
- Firms choose prices simultaneously
- Each firm assumes that their rivals prices are fixed
- Consumers purchase from the firm offering the lowest price
- If firms charge the same price, they split the market demand equally
- The Bertrand equilibrium occurs when firms charge a price equal to their marginal cost
- Setting price equal to marginal cost defines the Nash equilibrium
- The market price and quantity will align with perfect competition predictions
- The Bertrand paradox is the surprising result that even with only two firms, the outcome mirrors perfect competition
Kinked Demand Curve Model
- Paul Sweezy came up with the kinked demand curve model of oligopoly
- It explains price rigidity in oligopolistic markets
- Firms believe rivals will not follow if they raise prices
- Firms believe rivals will follow if they lower prices
- The demand curve kinks at the current market price
- The demand curve is more elastic above the current price than below it
- The marginal revenue curve has a discontinuity at the current output level
- Firms will not alter prices for small cost changes because the marginal cost curve can shift within the discontinuity
- It explains price rigidity but not how the initial price is determined
Stackelberg Model
- Heinrich von Stackelberg developed the Stackelberg model of oligopoly
- It is a quantity competition model
- It assumes a small number of firms producing a homogeneous product
- Firms do not act simultaneously
- One firm, the leader, selects its output level first
- The followers observe the leader's output and then choose their own output levels
- The leader knows the followers' reaction functions
- The leader maximizes its profit by considering the followers' reaction functions when choosing its output level
- The Stackelberg equilibrium is a Nash equilibrium
- The leader will produce more output and earn more profit than the followers
- Total output will be greater, and the price will be lower than in the Cournot equilibrium
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