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Econ HW Ch. 11

If it raises its price many of its customers will

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Unformatted text preview: a. Mutual interdependence is evident in the payoff matrix when the profits for each firm changes even though their prices may stay the same. For example, cells A and C show that X will be selling at $40, but depending on what Y sells for, their profits change. b. Assuming no collusion between X and Y, the pricing outcome would be cell D because that indicates X and Y selling for the lowest price ($35). X would make a profit of $55 and Y $58. c. Price collusion is mutually profitable because it allows the total amount of profits earned by both firms to be higher. By working together, they can either both raise their prices or only one firm raises its prices to enlarge profits. However, there is a temptation to cheat on the collusive arrangement because if one firm lowers its price, it will automatically be able to increase its profits. #9. The slope of a noncollusive oligopolist’s demand and marginal- revenue curves depends on whether its rivals match (straight lines D1 and MR1) or ignore (straight lines D2 and MR2) any price changes that it may initiate from the current price P0 (see graph a). In all likelihood an oligopolist’s rivals will ignore a price increase but follow a price cut (see graph b). This causes the oligopolist’s demand curve to be kinked (D2eD1) and the marginal- revenue curve to have a vertical break, or gap (fg). Because any shift in marginal costs between MC1 and MC2 will cut the vertical (dashed) segment of the marginal- revenue curve, no change in either price P0 or outp...
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