Ch12 - Monopolistic Competition and Oligopoly

The market share of the dominant firm drops from 75

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that each fringe firm will produce 9 units.  The market share of the dominant firm  drops from 75% to 67%. 218
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Chapter  12:  Monopolistic Competition and Oligopoly e. Suppose there continue to be five fringe firms but they each manage to reduce  their marginal cost to MC=20+2q.  How does this change your results? Again, we will follow the same method as we did in earlier parts of this problem.  Rewrite the fringe marginal cost curve to get   q = P 2 - 10.    The new total fringe  supply  curve  is five times the individual fringe supply  curve,  which  is just the  marginal cost curve:   Q f = 5 2 P - 50.   The new dominant firm demand curve is found  by   subtracting   the   fringe   supply   curve   from   the   market   demand   curve   to   get  Q D = 450 - 4.5 P .     The   new   dominant   firm   marginal   revenue   curve   is  MR =100 - 2 Q 4.5 .   The dominant firm will produce 180 units, price will be $60, and  each fringe firm will produce 20 units.  The market share of the dominant firm drops  from 75% to 64%. 14.  A lemon-growing cartel consists of four orchards.  Their total cost functions are: TC = 20 + 5Q 1 1 2 TC = 25 + 3Q 2 2 2 TC = 15 + 4Q 3 3 2 TC = 20 + 6Q 4 4 2 (TC is in hundreds of dollars, Q is in cartons per month picked and shipped.) a. Tabulate total, average, and marginal costs for each firm for output levels between  1 and 5 cartons per month (i.e., for 1, 2, 3, 4, and 5 cartons). The following tables give total, average, and marginal costs for each firm. Firm 1 Firm 2 Units  TC AC MC  TC AC MC 0  20 __ __  25 __ __ 1  25 25 5  28 28 3 2  40 20 15  37 18.5 9 3  65 21.67 25  52 17.3 15 4 100 25 35  73 18.25 21 5 145 29 45 100 20 27 Firm 3 Firm 4 Units  TC AC MC  TC AC MC 0  15 __ __  20 __ __ 1  19 19 4  26 26 6 2  31 15.5 12  44 22 18 3  51 17 20  74 24.67 30 4  79 19.75 28  116 29 42 5 115 23 36 170 34 54 219
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Chapter  12:  Monopolistic Competition and Oligopoly b. If the cartel decided to ship 10 cartons per month and set a price of 25 per carton,  how should output be allocated among the firms? The cartel should assign production such that the lowest marginal cost is achieved for  each unit, i.e., Cartel Unit Assigned Firm Assigned MC  1 2 3  2 3 4  3 1 5  4 4 6  5 2 9  6 3 12  7 1 15  8 2 15  9 4 18 10 3 20 Therefore, Firms 1 and 4 produce 2 units each and Firms 2 and 3 produce 3 units  each. c. At this shipping level, which firm has the most incentive to cheat?  Does any firm  not  have an incentive to cheat? At this level of output, Firm 2 has the lowest marginal cost for producing one more  unit beyond its allocation, i.e.,  MC  = 21 for the fourth unit for Firm 2.  In addition, MC   = 21 is less than the price of $25.   For all other firms, the next unit has a  marginal cost equal to or greater than $25.  Firm 2 has the most incentive to cheat,  while Firms 3 and 4 have no incentive to cheat, and Firm 1 is indifferent.
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