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1.
The models differ in their assumptions about firm behavior. The Cournot model assumes firms
choose quantities simultaneously (taking as given the other firm's quantity.) the Bertrand model
assumes firms choose prices simultaneously (taking as given the other firm's price.) The Stackelberg
model assumes one firm (the leader) chooses its quantity before the other firm (the follower)chooses
its quantity.
2.
Like the prisoner’s dilemma, members of the cartel will be better off if none of them cheat, but the
option to cheat is the dominant strategy for each.
3.
If there are more than two firms, the enforcer (who detects cheating and punishes it) will have higher
costs; all compliant firms have an incentive to shirk that duty.
4.
No; the assumption that one firm makes about the other firm's strategy is naive.
5.
If sunk costs are zero, entry and exit is easy, forcing incumbents to charge competitive prices.
6.
The extra utility that consumers get from product variety must be weighed against the higher prices
that result from product differentiation and monopolistic competition.
7.
A greater population density can sustain more product variety ceteris paribus. Greater transportation
costs also increase product variety. The higher the fixed cost of offering new products, the fewer new
products will be offered.
Answers to Chapter 13 Problems
1.
Shared monopoly:
MR = 15  2Q = MC = 3
2Q = 12,
Q = 6,
P = 9, Q
1
=Q
2
=3
∏
= 54  18 = 36,
∏
1
=
∏
2
= 18.
Cournot:
P
1
= 15  Q
1
 Q
2
= (15  Q
2
)  Q
1
MR
1
= (15  Q
2
)  2Q
1
= MC = 3
2Q
1
= 12  Q
2
Q
1
= 6  Q
2
/2
1's reaction function.
Q
2
= 6  Q
1
/2
2's reaction function.
Q
1
= Q
2
= 4.
Q=8.
P = 15  8 = 7
TR
1
= 7(4) = 28 = TR
2
∏
1
= 28  4(3) = 16 =
∏
2
;
∏
1
+
∏
2
=
32.
Bertrand:
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 Spring '08
 TOOSSI

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