hw4 ans - The Colorado College Department of Economics and...

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1 The Colorado College Department of Economics and Business Block 5 Econ 151 Homework #4 answers (1) 5. (a) Oligopoly is a market structure where a few firms are selling either similar or identical products. (b) Some examples of oligopoly markets are: Oil supplied by oil exporting countries (OPEC), telephone companies in the US, market for tennis balls, market for aircraft makers, cigarettes, light bulbs. (b) Let firm 1 be the low cost producer and hence the price leader. It sets the price and the other firm accepts this price and quantity. This is shown below: Both firms produce and sell Q 1 at price P 1 . Firm 1 maximizes profits but firm 2 does not. Its profit maximizing quantity and price is Q 2 and P 2 . AC 1 MC 1 AC 2 MC 2 D MR Q 1 Q 2 P 2 P 1 Q P, C, Rev
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2 (2) (a) The equilibrium price is $3 and quantity is 500. (b) The social cost curve lies above the market supply curve (c) The market overproduces than the socially efficient level. (d) A possible way to solve this is for the government to impose a tax of $2.
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