Suppose there are three firms in the widget industry. Widgets 'R' Us decides not to raise the price for its widgets for fear that The Widget Warehouse and Widgets Unlimited, Ltd. will maintain their prices and take away some of Widget's 'R' Us's market share. This decision on the part of Widgets 'R' Us is an example of allocative efficiency. collusion. mutual interdependence. price fixing.
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Step 1: The decision of Widgets ' R ' Us not to raise the price for its widgets shows that the firm is considering the actions of its competitors in making its pricing decision. Show more…
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The market for widgets is dominated by two firms which produce differentiated versions of the widget. Patents prevent any other firms from entering the market. The firms face demand curves as follows: 𝑞1 = 360 − 𝑝1 + 0.5𝑝2 𝑞2 = 360 − 𝑝2 + 0.5𝑝1 Equivalently, the firms’ inverse demand curves are given by: 𝑝1 = 720 − 4 /3 𝑞1 − 2/3 𝑞2 𝑝2 = 720 – 4/3 𝑞2 – 2/3 𝑞1 The firms have identical, constant marginal costs of £60 per unit: 𝑀𝐶1 = 𝑀𝐶2 = 60 a) Price versus quantity competition: Explain the intuition behind the conclusion that price competition is fiercer than quantity competition. Refer to the concepts of strategic complements and strategic substitutes. b) Stackelberg Duopoly: Compute each firm’s output at the subgame perfect equilibrium of the sequential game when firm 1 is the leader, and the firms compete on quantity. c) Price versus quantity competition with sequential choice: Why is there generally a first-mover advantage under sequential quantity competition and a second-mover advantage under sequential price competition?
Akash M.
Consider a market with one upstream firm, A, that produces widgets. Widgets are sold to two downstream firms, X and Y, that use widgets as inputs to produce a final good. Demand for the final good is given by P = 1 - Q, with Q = QX + QY. Firm A produces widgets with a marginal cost equal to a. On the other hand, firms X and Y require 2 (two) widgets for each unit of the final product that they produce. Assume, for now, that firm A sells widgets to X and Y at a price of ω. In addition to ω per widget bought, firms X and Y incur a cost of c per unit of the final good they produce. What are the equilibrium prices for the final good, widgets, equilibrium profits, and quantities for each firm if A sells to X and Y?
A firm in a perfectly competitive industry has patented a new process for making widgets. The new process lowers the firm's average cost curve, meaning this firm alone (although still a price taker) can earn real economic profits in the long run. a. If the market price is $\$ 20$ per widget and the firm's marginal cost curve is given by $M C=.4 q,$ where $q$ is the daily widget production for the firm, how many widgets will the firm produce? b. Suppose a government study has found that the firm's new process is polluting the air and estimates the social marginal cost of widget production by this firm to be $S M C=.5 q$ If the market price is still $\$ 20,$ what is the socially optimal level of production for the firm? What should the rate of a government-imposed excise tax be to bring about this optimal level of production? c. Graph your results.
Aarti K.
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