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ECON 1011 Lecture Notes - Lecture 14: Marginal Revenue, Oligopoly, Market Power

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Verified Note
maroonreindeer65
11 Oct 2018
School
GWU
Department
Economics
Course
ECON 1011
Professor
Steven Suranovic

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ECON 1011 Lecture Notes - Lecture 11: Taipei Metro, Economic Surplus, Marginal Revenue Productivity Theory Of Wages

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ECON 1011 Lecture Notes - Lecture 14: Marginal Revenue, Oligopoly, Market Power

15

ECON 1011 Lecture Notes - Lecture 15: Taipei Metro, Marginal Revenue, Marginal Cost

Document Summary

More than two firms in the marketplace that all produce a similar product. When there is an oligopoly, they have market power which means that they are able to influence prices as well as quantities produced. Total cost = marginal cost x quantity. Profit = total revenue - total cost. The monopoly outcome is marginal revenue = marginal cost (although it is not an exact match) Cartel: individual firms that group together and act as one firm. Suppose the two siblings apart of this cartel feud and decide to do the best they can on their own. Decide to change their output in the market in order to change their own profitability. Competition between the two firms (duopoly) can likely lead to both sides to produce more and thus lowering the total profit. In order to produce more output, more inputs are required. From here, competition causes the owners to lose profit. From here, the firm hires more workers.

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Related Questions

An oligopoly producing a homogeneous product is composed ofthree firms that act like a cartel. Assume that these three firmshave identical cost schedules. Assume also that if any one of thesefirms sets a price for the product, the other two firms charge thesame price. As long as they all charge the same price they willshare the market equally; and the quantity demanded of each will bethe same.
Below are the total-cost schedule of one of these firms andthe demand schedule that confronts it when the other firms chargethe same price as this firm. Complete the marginal-cost andmarginal-revenue schedules facing the firm.
Output Total Cost
 Marginal Cost
 Price Quantity Demanded
 Marginal Revenue
0
 $ 0



1
 60
 $______
 $ 260
 1
 $______
2
 100
240
 2
3
 160
220
 3
4 240
200 4
5 340
180 5
6 460
160 6
7
 600
140
 7
8 760
120
 8
Thank You
An oligopoly producing a homogeneous product is comprised ofthree firms that act like a cartel. Assume that these three firmshave identical cost schedules. Assume also that if any one of thesefirms sets a price for the product, the other two firms charge thesame price. As long as they all charge the same price they willshare the market equally; and the quantity demanded of each will bethe same.
Below are the total-cost schedule of one of these firms andthe demand schedule that confronts it when the other firms chargethe same price as this firm. Complete the marginal-cost andmarginal-revenue schedules facing the firm.
Output Total Cost
 Marginal Cost
 Price
 Quantity Demanded
 Marginal Revenue
0
 $ 0



1
 180
 $_____
 $ 780
 1
 $_____
2
 300
720
 2
3
 180
660
 3
4 720 600 4
5 1020 540 5
6 1380 480 6
7
 1800
420
 7
8 2280 360 8
Thank You

2. Deviating from the collusive outcome

Mays and McCovey are beer-brewing companies that operate in a duopoly (two-firm oligopoly). The daily marginal cost (MC) of producing a can of beer is constant and equals $0.80 per can. Assume that neither firm had any startup costs, so marginal cost equals average total cost (ATC) for each firm.

Suppose that Mays and McCovey form a cartel, and the firms divide the output evenly. (Note: This is only for convenience; nothing in this model requires that the two companies must equally share the output.)

Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and combined quantity of output if Mays and McCovey choose to work together.

Monopoly Outcome PRICE (Dollars per can)QUANTITY (Thousands of cans of beer)DemandMRMC = ATC

When they act as a profit-maximizing cartel, each company will producecans and chargeper can. Given this information, each firm earns a daily profit of, so the daily total industry profit in the beer market is.

Oligopolists often behave noncooperatively and act in their own self-interest even though this decreases total profit in the market. Again, assume the two companies form a cartel and decide to work together. Both firms initially agree to produce half the quantity that maximizes total industry profit. Now, suppose that Mays decides to break the collusion and increase its output by 50%, while McCovey continues to produce the amount set under the collusive agreement.

Mays’s deviation from the collusive agreement causes the price of a can of beer to toper can. Mays's profit is now, while McCovey’s profit is now. Therefore, you can conclude that total industry profit when Mays increases its output beyond the collusive quantity.