70.The two leading U.S. manufacturers of high performance radial tires must set their advertising strategies for the coming year. Each firm has two strategies available: maintain current advertising or increase advertising by 15%. The strategies available to the two firms, G and B, are presented in the payoff matrix below.Firm BIncrease Adv.Maintain Adv.Firm GIncrease Adv.27, 2750, 12Maintain Adv.12, 5045, 45The entries in the individual cells are profits measured in millions of dollars. Firm G's outcome is listed before the comma, and Firm B's outcome is listed after the comma.a.Which oligopoly model is best suited for analyzing this decision? Why? (Remember it is illegal to collude in the United States.)b.Carefully explain the strategy that should be used by each firm. Support your choice by including numbers. Solution: 195
TEST BANK CHAPTER 12 SIXTH EDITION MONOPOLISTIC COMPETITION AND OLIGOPOLY Section 12.6 difficult 71.The market for an industrial chemical has a single dominant firm and a competitive fringe comprised of many firms that behave as price takers. The dominant firm has recently begun behaving as a price leader, setting price while the competitive fringe follows. The market demand curve and competitive fringe supply curve are given below. Marginal cost for the dominant firm is $0.75 per gallon.QM= 140,000 - 32,000P QF= 60,000 + 8,000P, where QM= market quantity demanded, and QF= the supply of the competitive fringe. Quantities are measured in gallons per week, and price is measured as a price per gallon.a.Determine the price and output that would prevail in the market under the conditions described above. Identify output for the dominant firm as well as the competitive fringe.b.Assume that demand curve shifts rightward by 40,000 units. Show that the dominant firm is indeed a price leader. What output (leader and follower) and market price will prevail after the change in demand? Solution: D
CHAPTER 12 TEST BANK MONOPOLISTIC COMPETITION AND OLIGOPOLY SIXTH EDITION
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