Principles of Economics- Mankiw (5th) 342

Principles of Economics- Mankiw (5th) 342 - 352 PA R T F I...

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352 PART FIVE FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY small quantity of output and charging a price above marginal cost. Yet because each oligopolist cares about only its own profit, there are powerful incentives at work that hinder a group of firms from maintaining the monopoly outcome. A DUOPOLY EXAMPLE To understand the behavior of oligopolies, let’s consider an oligopoly with only two members, called a duopoly. Duopoly is the simplest type of oligopoly. Oligop- olies with three or more members face the same problems as oligopolies with only two members, so we do not lose much by starting with the case of duopoly. Imagine a town in which only two residents—Jack and Jill—own wells that produce water safe for drinking. Each Saturday, Jack and Jill decide how many gal- lons of water to pump, bring the water to town, and sell it for whatever price the market will bear. To keep things simple, suppose that Jack and Jill can pump as much water as they want without cost. That is, the marginal cost of water equals zero. Table 16-1 shows the town’s demand schedule for water. The first column
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