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What is the primary decision firms make in a Cournot oligopoly model?
What is the primary decision firms make in a Cournot oligopoly model?
In the context of the Cournot model, what does the equation P = 30 - Q represent?
In the context of the Cournot model, what does the equation P = 30 - Q represent?
What effect does increasing their own output have on firms in a Cournot oligopoly?
What effect does increasing their own output have on firms in a Cournot oligopoly?
What does the term 'Nash equilibrium' refer to in this context?
What does the term 'Nash equilibrium' refer to in this context?
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What is a primary characteristic of firms in a Cournot oligopoly compared to those in a monopoly?
What is a primary characteristic of firms in a Cournot oligopoly compared to those in a monopoly?
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How is total profit represented for Firm 1 in the Cournot model?
How is total profit represented for Firm 1 in the Cournot model?
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What kind of product is assumed in the Cournot model of oligopoly?
What kind of product is assumed in the Cournot model of oligopoly?
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Which of the following best describes the nature of costs in the Cournot model for each firm?
Which of the following best describes the nature of costs in the Cournot model for each firm?
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What is Firm 1's optimal output response to Firm 2's output?
What is Firm 1's optimal output response to Firm 2's output?
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What does the profit function for Firm 1 look like?
What does the profit function for Firm 1 look like?
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To find the Nash equilibrium, which method is used?
To find the Nash equilibrium, which method is used?
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What is the marginal cost for Firm 1 as mentioned in the content?
What is the marginal cost for Firm 1 as mentioned in the content?
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What happens to Firm 1’s optimal production as Firm 2 increases its output?
What happens to Firm 1’s optimal production as Firm 2 increases its output?
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What is Firm 1's marginal revenue function derived from its revenue?
What is Firm 1's marginal revenue function derived from its revenue?
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Which statement about the graphical representation of Firm 1's best response is true?
Which statement about the graphical representation of Firm 1's best response is true?
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What does the intercept of Firm 1's best response function indicate when $Q2 = 0$?
What does the intercept of Firm 1's best response function indicate when $Q2 = 0$?
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What condition must be met for the shortcut method to find the Cournot equilibrium to be applicable?
What condition must be met for the shortcut method to find the Cournot equilibrium to be applicable?
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In the approach extended to many firms, what is the primary consideration for firm i's output choice?
In the approach extended to many firms, what is the primary consideration for firm i's output choice?
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What is the sum $Q$ represented as in the demand function provided?
What is the sum $Q$ represented as in the demand function provided?
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Under what circumstances does the price $p$ become a function of firm i's output?
Under what circumstances does the price $p$ become a function of firm i's output?
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In the context of the Cournot model, how is the output $Q_i$ for firm i expressed?
In the context of the Cournot model, how is the output $Q_i$ for firm i expressed?
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What happens to the demand function if the total output exceeds $D$?
What happens to the demand function if the total output exceeds $D$?
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What is a key feature of firms in an industry represented by $N$ identical firms?
What is a key feature of firms in an industry represented by $N$ identical firms?
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If firm i decides to increase its output, what is the expected immediate effect on the market price?
If firm i decides to increase its output, what is the expected immediate effect on the market price?
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What equation represents Firm i's profit function?
What equation represents Firm i's profit function?
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How do you find Firm i's best response in the Cournot competition model?
How do you find Firm i's best response in the Cournot competition model?
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What happens to each firm's output as the number of firms N increases?
What happens to each firm's output as the number of firms N increases?
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What is the final price behavior in the Cournot competition model as N tends to infinity?
What is the final price behavior in the Cournot competition model as N tends to infinity?
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What does the equation $qi^* = \frac{D - Q_i - c}{2}$ represent?
What does the equation $qi^* = \frac{D - Q_i - c}{2}$ represent?
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In the context of Bertrand competition, what do firms primarily decide on?
In the context of Bertrand competition, what do firms primarily decide on?
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Which of the following statements about static oligopoly is true?
Which of the following statements about static oligopoly is true?
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What is the main implication when all firms have the same costs in the given model?
What is the main implication when all firms have the same costs in the given model?
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What is the outcome when bidding truthfully results in losing the auction?
What is the outcome when bidding truthfully results in losing the auction?
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What occurs when the highest bid from others exceeds your own value?
What occurs when the highest bid from others exceeds your own value?
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In a scenario where the highest bid is between your value and your understated bid, what happens when you bid truthfully?
In a scenario where the highest bid is between your value and your understated bid, what happens when you bid truthfully?
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What does it imply if one bidding strategy is weakly dominated by another in an auction?
What does it imply if one bidding strategy is weakly dominated by another in an auction?
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When can bidding below your value be advantageous?
When can bidding below your value be advantageous?
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If the highest bid is below your understated bid, what is the result of bidding truthfully?
If the highest bid is below your understated bid, what is the result of bidding truthfully?
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What distinguishes the payoffs represented in the dominant bidding strategy?
What distinguishes the payoffs represented in the dominant bidding strategy?
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In a second price auction, what is a likely result of bidding truthfully?
In a second price auction, what is a likely result of bidding truthfully?
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What effect do price guarantees have on consumer behavior?
What effect do price guarantees have on consumer behavior?
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How many Nash equilibria are found in the game described?
How many Nash equilibria are found in the game described?
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What phenomenon occurs due to capacity constraints on the ferry?
What phenomenon occurs due to capacity constraints on the ferry?
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If Firm 1 sets a price of $35, what is Firm 2's optimal response if they want to maximize profit?
If Firm 1 sets a price of $35, what is Firm 2's optimal response if they want to maximize profit?
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Why might price guarantees be considered collusive?
Why might price guarantees be considered collusive?
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What happens when firms compete aggressively on price in this context?
What happens when firms compete aggressively on price in this context?
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Which pricing strategy would result in the highest profit for Firm 2 when competing with Firm 1's price of $35?
Which pricing strategy would result in the highest profit for Firm 2 when competing with Firm 1's price of $35?
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What underlying reason leads to the multiple Nash equilibria found in the game?
What underlying reason leads to the multiple Nash equilibria found in the game?
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Study Notes
Static Oligopoly
- Static oligopoly models industries with multiple competing firms.
- There's no single "correct" model, but several types exist.
- Cournot's model examines quantity competition in a homogeneous product market. This describes competition in the long run when firms are deciding how many factories to build.
- In Cournot models, firms simultaneously choose quantities, affecting the price, and the profit of each depends on the output of the other.
- The example of a two-firm Cournot oligopoly demonstrates the interplay of decision-making.
Cournot Example
- Demand: The total market price (P) = 30 - (Q1 + Q2), where Q1 and Q2 are the outputs of firms 1 & 2 respectively
- Cost: Each firm has a constant marginal cost (MC) of 6, which means the total cost is C(Qi)=6Qi for each firm.
- Profits: The profit for each firm (π1,π2) are calculated by P x Q - C(Q). With these figures, firms' profits are dependent on the output of other firms.
Profit Calculation
- Profit for firm 1, given quantities of both firms π1(Q1, Q2)= (30 – (Q1 + Q2))Q1 - 6Q1
- Profit for firm 2, π2(Q1, Q2)= (30 – (Q1 + Q2))Q2 - 6Q2
Best Response Analysis
- Firms' best response is the quantity that maximizes profit given the quantity chosen by the other firm.
- A firm's best response can be found by taking the derivative of its profit function with respect to its quantity and setting it to zero or by looking at the firms revenue curve and where it meets the marginal revenue curve.
- The best response function shows the output level that maximizes profit for one firm, which is dependent on the output of the other firm.
Nash Equilibrium
- Nash Equilibrium is the point where the best responses for both firms intersect.
- In the example, the Cournot equilibrium is found where the reaction functions Q1 = 12−0.5Q2 and Q2 = 12−0.5Q1 intersect.
- This represents a stable outcome, as neither firm can improve its profit by changing its quantity if the other firm maintains its quantity at this point, q1 = q2 = 8.
Generalization to Multiple Firms
- Cournot model can be generalized to many firms in an industry.
- The essential logic remains the same—firms simultaneously choose quantities.
- The market price and the demand for each firm depend on the total quantity produced by all firms.
- The number of firms affects market equilibrium, and the price tends to MC as the number of firms increases, approaching that of a perfect competition.
Bertrand Competition
- Firms choose prices rather than quantities.
- In the example, all firms selling identical products.
- The lowest-priced firm captures the entire market; if prices are equal, firms share the market.
Differentiated Product Oligopoly
- Firms offer different products, so firms' prices affect each other’s market share but not as directly as in homogenous models.
- Firm's profit depends on their price and the price of competing firms.
- In these games, the firms can often write down each firm's reaction function that expresses the firm’s best choice of output as a function of the choice of the other firm.
- Nash equilibrium will be where these intersect.
- When firms continuously to vary their price, determining optimal price could be a problem in these models. Discreteness in pricing can solve this problem, which is represented in game theory.
Single-Unit Auctions
- Auctions where a single item is sold to the highest bidder (second-price auction).
- Bidder's strategy is to bid their value; bidding truthfully is a dominant strategy.
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Description
Explore the dynamics of static oligopoly and Cournot competition through this insightful quiz. Learn how firms make decisions regarding output in a competitive market and analyze the impact on pricing and profits. Engage with examples and formulas to deepen your understanding of oligopoly behavior.
