ECON106 San Jose State Managerial Economics Questions Response The demand function for an oligopolistic market is given by the equation, Q = 180 – 4P, whe

ECON106 San Jose State Managerial Economics Questions Response The demand function for an oligopolistic market is given

by the equation, Q = 180 – 4P, where Q is quantity demanded and

P is price. The industry has one dominant firm whose marginal cost

function is: MC = 12 + .1QD, and many small firms, with a total

supply function: QS = 20 + P.

(a) Derive the demand equation for the dominant oligopoly firm.

(b) Determine the dominant oligopoly firm’s profit-maximizing output

and price.

(c) Determine the total output of the small firms. San Jose State University
Department of Economics
Homework 4
ECON 106: Managerial Economics
Prof. Hajikhameneh
Spring 2018
1. (20 points). Kiwi Inc. dominates the wholesale chicken market in
New Zealand. Its production cost is: long-run average cost (LAC) =
long-run marginal cost (LMC) = $2 per pound and demand is given by
P = 6 ? 2Q, where P denotes price per pound and Q denotes output
(in millions of pounds).
(a) Determine Kiwi’s output and price (presuming it faces no other
competitors).
(b) Over the last five years, a Southeast Asian nation has dramatically
increased its exports of chicken to New Zealand. That nation’s
cost structure (with lower labor costs and higher shipping costs)
is the same as Kiwi’s. Find the long-run output and price under
perfect competition.
(c) New Zealand lawmakers have decided to enact a $1 per pound
tariff on all chicken imports. What is the new equilibrium price?
Suppose that imports fall to Q I = .5 million pounds, what is
Kiwi’s output? Compute consumer surplus and Kiwi’s profit.
How has the tariff affected total welfare?
2. (15 points). The demand function for an oligopolistic market is given
by the equation, Q = 180 ? 4P, where Q is quantity demanded and
P is price. The industry has one dominant firm whose marginal cost
function is: MC = 12 + .1Q D , and many small firms, with a total
supply function: QS = 20 + P.
(a) Derive the demand equation for the dominant oligopoly firm.
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(b) Determine the dominant oligopoly firm’s profit-maximizing output and price.
(c) Determine the total output of the small firms.
3. (15 points). In a Cournot duopoly, both firms face the market demand:
P = 100 ? Q D , where P is price and Q D is total quantity demanded in
the market. Firm 1’s cost function is given by C1 = .8Q21 and firm 2’s
cost function is given by C2 = 6Q2 , where Q1 is firm 1’s output and
Q2 is firm 2’s output. Derive firms’ optimal reaction functions and
calculate equilibrium quantities and price.
4. (20 points). Nintendo and Sony Playstation are each planning to
introduce one new game into the market. Each is considering three
different kinds of games: an urban action game like Grand Theft Auto,
an adventure game like Tomb Raiders, or a strategy game like Sim
City. The table shows each firm’s profits (Sony’s profit first) in millions
of dollars:
Sony
Grand Theft
Tomb Raiders
Sim City
Grand Theft
2, 2
3, 10
4, 8
Nintendo
Tomb Raiders
7, 3
?3, ?3
2, 1
Sim City
8,4
1,2
-7,-7
(a) Assuming the firms act independently, find the equilibrium outcome.
Briefly, explain your answer. Is this game an example of the prisoner’s
dilemma?
(b) Nintendo knows for a fact that Sony will not decide on its new
project for four months. As CEO of Nintendo, what would you do
immediately based on the analysis above?
(c) ) If the firms were free to coordinate their decisions, what agreement
(and actions) would they take? Explain briefly.
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