Lecture+18+November+9

Lecture+18+November+9 - Todays agenda Models of imperfect...

Info iconThis preview shows pages 1–10. Sign up to view the full content.

View Full Document Right Arrow Icon
Today’s agenda Models of imperfect competition Monopolistic competition Oligopoly
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
When a firm with monopoly power is maximizing profit, A. P = SATC > SMC B. P = SMC > MR C. P > MR = SMC D. P = SMC = SATC E. P > MR = SATC
Background image of page 2
Multiplant monopoly Plants 1 and 2 have different cost functions How should the firm allocate production between the plants?
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Multiplant monopoly Rule for profit maximization MR = MC 1 = MC 2 If MC 1 > MC 2 , the firm should shift production from plant 1 to plant 2. If MR > MC 1 , the firm should increase production in plant 1.
Background image of page 4
Cartels P > MR = MC 1 = MC 2 It will always increase total industry profits for all the firms in a perfectly competitive industry equilibrium to restrict output. In competitive equilibrium, P = MC 1 (Q 1 ) = MC 2 (Q 2 ) Joint profit maximization calls for P > MC 1 (Q 1 ) = MC 2 (Q 2 ) Such an output restriction is called a cartel .
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Cartel difficulties Need to prevent entry Need to enforce output restrictions Any firm has an incentive to expand its output if no one else does.
Background image of page 6
Oligopoly Oligopoly = “few sellers” Total profits of any industry are always larger if firms cooperate in charging high P and restricting Q MC 1 = MC 2 = … = MC n = MR < P Any single firm increases its profit if it defects from such an agreement and increases Q MC 1 < MR 1 = P Oligopolistic firms recognize that they are interdependent .
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Nash equilibria 2,8 4,6 3,8 Bottom 0,7 3,4 2,5 Middle Player 1 1,3 4,5 1,4 Top Right Center Left Player 2 A Nash equilibrium is comprised of a strategy for every player, each of which is a best reply to the other’s strategy.
Background image of page 8
2,8 4,6 3,8 Bottom 0,7 3,4 2,5 Middle Player 1 1,3 4,5 1,4 Top Right Center Left Player 2 Step 1: Find the column maxima for 1. Step 2: Find the row
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 10
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 43

Lecture+18+November+9 - Todays agenda Models of imperfect...

This preview shows document pages 1 - 10. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online