Exam Solution Manual for ECON 705- Latest Update 2025 (Fully Solved)
A firm's market power ____ with an increase in competition. - Answers declines
oligopoly: - Answers an industry dominated by a few large firms producing near or perfect substitutes
Examples of oligopolies: - Answers automobile industry
gas industry
What are distinguishing features of oligopolies? - Answers -strategic behavior
-advertising competition --> reinforcing customer loyalty through product differentiation
What is the goal of oligopolies? - Answers to carve out a market niche of loyal customers
collusion: - Answers firms cooperating by forming a multi-plant coalition to maximize joint profits
Oligopoly Models: - Answers 1. Cournot
2. Stackelberg
3. Collusion
(1 & 2 involve rivalry interaction)
Cournot Model: - Answers 1. duopoly
2. firms make simultaneous and independent decisions on how much to product
3. outputs are perfect substitutes
4. industry supply = sum of each firm's output
5. market price adjusts to clear the market
6. firms attempt to maximize their own profits
What is the objective of firms using the oligopoly model? - Answers to maximize profits given the output
of its rival
Best response function is AKA ____. - Answers reaction function
best response function: - Answers output level of firm 1 (or 2) when plugging in the other firm's output
level
, profit max where Q @ MR = MC
Cournot equilibrium: - Answers where firm 1 & 2 profit-maximizing output levels are equal
How is output determined in the Stackelberg Model? - Answers sequentially
Who has a reaction function in the Stackelberg Model? - Answers only the Stackelberg follower
Who has a reaction function in the Cournot Model? - Answers both firms
What does the Stackelberg leader enjoy? - Answers a first-mover advantage
What is assumed about the Stackelberg leader? - Answers they know the follower's reaction function
Cournot output setting is not ____. - Answers optimal
Why is Cournot not optimal? - Answers both firms would be better off by forming a coalition
BUT this does not happen because both firms have the incentive to maximize their individual profits
Collusion involves firms behaving like a ____. - Answers multi-plant monopolist
Why don't firms choose to collude rater than compete? - Answers -price fixing is illegal in many
countries
-the present value of future earnings from collusion are less than the present value of future earnings
from compeition
Collusion model = - Answers lower output
higher price
greater industry and firm profit
Cournot model = - Answers higher output
lower price
less industry and firm profit
A firm's market power declines with an ____ in competition. - Answers increase
What clears the market in the Cournot Model? - Answers market price adjusts to clear the market
Monopolistic Competition: - Answers 1. exhibit characteristics of perfect competition and monopolies
2. large number of firms
3. low barrier to entry
A firm's market power ____ with an increase in competition. - Answers declines
oligopoly: - Answers an industry dominated by a few large firms producing near or perfect substitutes
Examples of oligopolies: - Answers automobile industry
gas industry
What are distinguishing features of oligopolies? - Answers -strategic behavior
-advertising competition --> reinforcing customer loyalty through product differentiation
What is the goal of oligopolies? - Answers to carve out a market niche of loyal customers
collusion: - Answers firms cooperating by forming a multi-plant coalition to maximize joint profits
Oligopoly Models: - Answers 1. Cournot
2. Stackelberg
3. Collusion
(1 & 2 involve rivalry interaction)
Cournot Model: - Answers 1. duopoly
2. firms make simultaneous and independent decisions on how much to product
3. outputs are perfect substitutes
4. industry supply = sum of each firm's output
5. market price adjusts to clear the market
6. firms attempt to maximize their own profits
What is the objective of firms using the oligopoly model? - Answers to maximize profits given the output
of its rival
Best response function is AKA ____. - Answers reaction function
best response function: - Answers output level of firm 1 (or 2) when plugging in the other firm's output
level
, profit max where Q @ MR = MC
Cournot equilibrium: - Answers where firm 1 & 2 profit-maximizing output levels are equal
How is output determined in the Stackelberg Model? - Answers sequentially
Who has a reaction function in the Stackelberg Model? - Answers only the Stackelberg follower
Who has a reaction function in the Cournot Model? - Answers both firms
What does the Stackelberg leader enjoy? - Answers a first-mover advantage
What is assumed about the Stackelberg leader? - Answers they know the follower's reaction function
Cournot output setting is not ____. - Answers optimal
Why is Cournot not optimal? - Answers both firms would be better off by forming a coalition
BUT this does not happen because both firms have the incentive to maximize their individual profits
Collusion involves firms behaving like a ____. - Answers multi-plant monopolist
Why don't firms choose to collude rater than compete? - Answers -price fixing is illegal in many
countries
-the present value of future earnings from collusion are less than the present value of future earnings
from compeition
Collusion model = - Answers lower output
higher price
greater industry and firm profit
Cournot model = - Answers higher output
lower price
less industry and firm profit
A firm's market power declines with an ____ in competition. - Answers increase
What clears the market in the Cournot Model? - Answers market price adjusts to clear the market
Monopolistic Competition: - Answers 1. exhibit characteristics of perfect competition and monopolies
2. large number of firms
3. low barrier to entry
