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Briefly describe the differences between the Cournot, Bertrand, and Stackelberg models. What assumptions do they make about the other firm’s behavior?

 

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Answer:

 

  1. The Bertrand model assumes that the competitor holds price constant. The Cournot model assumes the competitor holds quantity constant. The Stackelberg leader maximizes its profits subject to the profit-maximizing reaction of its rivals.

Briefly describe the differences between the Cournot

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  1. In early editions of your text, oligopoly and monopolistic competition were separate chapters. Now they are combined. Why do you suppose this is true? What is the most prominent characteristic that makes joining these concepts a logical move?

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Answer:

  1. In both market types the actors are interdependent which is unlike either perfect competition or monopoly. The choices of one firm are dependent on what the other firm does or is expected to do. This is obvious in the Bertrand, Cournot and Stackelberg models as well as the Chamberlin model. Differentiated characteristics of a product like gasoline or soap are determined by cost-benefit factors that are influenced by a competitor’s behavior.

 

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  1. Does the equilibrium in the Cournot model satisfy the definition of a Nash equilibrium?

 

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  1. No; the assumption that one firm makes about the other firm’s strategy is naive.

 

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  1. The market demand curve for a pair of Cournot duopolists is given as P = 36 – 3Q, where Q = Q1 + Q2. The constant per unit marginal cost is $18 for each duopolist.  Find the Cournot equilibrium price, quantity, and profits.

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Answer:

  1. P1= 36 -3Q = 36 – 3 (Q1 + Q2) = (36 – 3 Q2) – 3 Q1.

MR1 = (36 -3 Q2) – 6 Q1 = MC = 18.

1’s reaction function: Q1 = 3 – (1/2) Q2.

Similarly for 2: Q2 = 3- (1/2) Q1.

This solves for   Q1 = Q2 = 2.

P = 36 – 3Q = 36 – 3(4) = 24.

1 = TR – TC = 2(24) – 2(18) = 12 = 2.

= 1 + 2 = 24.

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  1. Solve the preceding problem for Bertrand duopolists.

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  1. P = MC = 18.

Since P = 36 – 3Q, we have Q = 6.

Thus, Q1 = Q2 = Q/2 = 3.

TR1 = TR2 = 3(18) = 54.

TC1 = TC2 = 3(18) = 54.

And so 1 = 2 = = 0.

Briefly describe the differences between the Cournot