Scribd
Upload
91 views3 pages

Problem Set Oligopoly

This document contains 10 problem sets related to oligopoly market structures, game theory, and strategic decision making. The problems involve finding reaction curves, Nash equilibria, and determining socially optimal outcomes for firms competing on quantity or price under different market conditions and games.

Uploaded by

asmitamittal1998
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
91 views3 pages

Problem Set Oligopoly

This document contains 10 problem sets related to oligopoly market structures, game theory, and strategic decision making. The problems involve finding reaction curves, Nash equilibria, and determining socially optimal outcomes for firms competing on quantity or price under different market conditions and games.

Uploaded by

asmitamittal1998
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 3

Problem Set

MEC 103
Aishna Sharma
April 2024

1. Let the market demand curve be given by P=20-4Q. There are only two firms addressing
the entire market and the product is homogenous in nature. Each firm considers the
quantity set by its competitor as given and then determines its residual demand.
Assume the marginal cost faced by each firm is zero. Find out the reaction curve of each
firm in equilibrium. Plot both the reaction curves on a graph.

2. Suppose the market demand is given by P=10-Q. There are two firms in the industry
competing with each other for market share of a homogenous product. Let the Total
Cost function faces by Firm 1 be TC1= 2q1 and that by firm 2 be TC2=2q2.
A. The firms decide to simultaneously strategise about the quantity that each would
sell in the market. What would be the profit maximizing quantities sold by each
firm?
B. Suppose these firms decide to form a cartel, and act like a monopolist. What would
be the optimal outcome in that case?
C. Which of the above outcomes is socially more efficient?

3. Consider the same demand curve and cost curves of the firms as above. The firm
decides to strategise about price rather than quantity. Assume that firms are producing
homogenous products. What would be the outcome? Do you think this outcome is
socially efficient? Why or why not?

4. Oligopoly market structure is a better situation than a Monopoly but worse than a
Perfectly Competitive market. Do you agree with this statement or not? Why?

5. Let the inverse demand function and the cost function be given by P = 50 − 2Q and C =
10 + 2q respectively, where Q is total industry output and q is the firm’s output. Suppose
there are two firms in the industry and the firms make decision about the quantities to
be produced simultaneously, find out
a) The reaction functions of each firm
b) The equilibrium quantity sold by each firm, the price charged by each firm, and the
profits by each firm.
c) How would the equilibrium change of the firms collude and behave like a
Monopolist?

6. Suppose Coca-Cola’s and Pepsi’s demand curves are given by Q1 = 64 +2P2- 4P1 and Q2 =
50+P1-5P2, respectively. Coca-Cola’s marginal cost is $5 per unit, and Pepsi’s marginal
cost is $4 per unit.
a) What is Coca-Cola’s profit-maximizing price when Pepsi’s price is $8?
b) What is the equation of Coca-Cola’s price reaction function (i.e., Coca-Cola’s profit
maximizing price when Pepsi sets an arbitrary price P2)?
c) What are Coca-Cola’s and Pepsi’s profit-maximizing prices and quantities at the
Bertrand equilibrium?

7. Consider the following version of Prisonner’s Dilemma Game.

Player 2
Cooperate Cheat
Player 1 Cooperate $10, $10 $0, $12
Cheat $12, $0 $5, $5

a. What is the Nash Equilibrium of this game?


b. Can (Cooperate, Cooperate) be the equilibrium of this game?

8. Consider the game of chicken. Two players drive their cars down the center of
the road directly at each other. Each player chooses SWERVE or STAY. Staying wins you
the admiration of your peers (a big payoff) only if the other player swerves. Swerving
loses face if the other player stays. However, clearly, the worst output is for both players
to stay! Specifically, consider the following payouts.

Player 2
Stay Swerve
Player 1 Stay -6, -6 2, -2
Swerve -2, 2 1, 1
a) Does it have a Nash Equilibrium? If yes, what is the Nash Equilibrium of this game?

9. Consider the following game. Two criminals are thinking about pulling off a bank robbery.
The take from the bank would be $20,000 each, but the job requires two people (one to rob
the bank and one to drive the getaway car). Each criminal could instead rob a liquor store.
The take from robing a liquor store is only $1000 but can be done with one person acting
alone.
a) Write down the payoff matrix for this game.
b) Find out the equilibrium / equilibria for this game.

10. Consider the following game:

Player 2
H L
Player 1 H 3,3 1,2
L 4,1 2,2

What is the Nash Equilibrium of this game?

You might also like