Problem Set 3 1. How can an elastic demand curve deter the formation of a carte

Problem Set 3
1. How can an elastic demand curve deter the formation of a cartel?
2. Explain why collusive pricing is di?cult in one-period competition and easier when ?rms interact
over a number of periods.
3. Discuss factors that may facilitate collusion.
4. Suppose that market demand is described by P = 100 ? (Q + q ), where P is the market price, Q
is the output of the incumbent ?rm and q is the output of a potential entrant to the market. The
incumbent ?rm’s total cost function is T C (Q) = 40Q, whereas the cost function of the entrant is
T C (q ) = 100 + 40q , where 100 is a sunk cost incurred to enter the market.
a. If the entrant observes the incumbent producing Q units of output and expects this output level
to be maintained, write down the equation for the residual demand curve that the entrant ?rm
faces.
b. If the entrant ?rm maximizes pro?t given the residual demand curve in a., what output q e will
the entrant produce? (Your answer should be a function of Q.)
c. How much output would the incumbent ?rm have to produce to just keep the entrant out of the
market? That is, solve for the limit output QL . At what price will the incumbent sell the limit
output?
5. Please solve the Practice Problem 12.3 at page 282 from the textbook.
6. Explain why predatory strategies do not work in an industry if no substantial sunk costs exist.
7. Why is predatory pricing unlikely to occur when all ?rms are identical?
8. Tiger-el is an upstream manufacturer of electric trains that sells wholesale to The Great Toy Store, the
only such store in the area. Demand for the trains at the retail store in inverse form is P = 1, 000 ? 2Q,
where Q is the total number of trains sold. The Great Toy Store incurs no service cost in selling the
train. Its only cost is the wholesale price it pays for each train. Tiger-el incurs a production cost of
$40 per train.
a. What wholesale price should Tiger-el charge for its trains? What price will these trains sell for
at retail? How many trains will be sold?
b. What pro?t will Tiger-el and The Great Toy Store earn under the pricing choices you found in
part a.? What is the total pro?t of these two ?rms?
c. Now assume Tiger-el and The Great Toy Store merge into one ?rm and they are maximizing
joint pro?ts. What would be the retail price and quantity sold in this case? Calculate the joint
pro?ts.
d. Compare the total pro?ts you ?nd in part b. and c.. Which one is greater? Why?
9.

Our website has a team of professional writers who can help you write any of your homework. They will write your papers from scratch. We also have a team of editors just to make sure all papers are of HIGH QUALITY & PLAGIARISM FREE. To make an Order you only need to click Ask A Question and we will direct you to our Order Page at WriteDemy. Then fill Our Order Form with all your assignment instructions. Select your deadline and pay for your paper. You will get it few hours before your set deadline.