Answer: 1
Interdependency in Oligopoly
Oligopoly is a market structure, where a few firms produce all or most of the market supply of a particular good or service and whose decisions about the industry’s output can affect competitors. In oligopoly industry, output of each firm is a large share of the market. As a result, each firm’s pricing and output decisions have a substantial effect on the profitability of other firms. In addition, when making decisions relating to price or output or investment, each firm has to take into consideration the likely reaction of rival firms (Arnold, 2010).
Oligopoly requires high degree of interdependence because the behavior of firms is affected by actions of other rivalry firms. Any successful competitive technique is rapidly imitated by other firms as they try to expand their own market shares. In oligopolistic market, success depends on assessing responses of rivals. Each firm is so large that its actions affect market conditions. Therefore the competing firms will be aware of a firm’s market actions and will respond appropriately (Boyes & Melvin, 2010).
Answer 2:
(a) Demand and Cost Structure in the Short Run
|
Output |
Price ($) |
FC |
VC |
TC |
TR |
Profit/(Loss) |
|
0 |
90 |
90 |
0 |
90 |
0 |
(90) |
|
1 |
80 |
90 |
40 |
130 |
80 |
(50) |
|
2 |
70 |
90 |
80 |
170 |
140 |
(30) |
|
3 |
60 |
90 |
140 |
230 |
180 |
(50) |
|
4 |
50 |
90 |
220 |
310 |
200 |
(110) |
|
5 |
40 |
90 |
320 |
410 |
200 |
(210) |
|
6 |
30 |
90 |
440 |
530 |
180 |
(350) |
|
7 |
20 |
90 |
580 |
670 |
140 |
(530) |
(Source: McEachern, 2011).
(b) Level of Output Minimizes Loss
Output level of 2 will minimize the loss for monopolistically competitive firm. It is because below and above this output level, firm will gain more loss. At this level loss is $30 that is minimum in comparison losses at other output level.
(c) Recommendations
A monopolistic firm should shut down its business in case if P
Calculation of AVC, MR and MC
|
Output |
Price ($) |
VC |
AVC |
MR |
MC |
|
0 |
90 |
0 |
0 |
|
|
|
1 |
80 |
40 |
40 |
80 |
40 |
|
2 |
70 |
80 |
40 |
60 |
40 |
|
3 |
60 |
140 |
46.67 |
40 |
60 |
|
4 |
50 |
220 |
55 |
20 |
80 |
|
5 |
40 |
320 |
64 |
0 |
100 |
|
6 |
30 |
440 |
73.33 |
-20 |
120 |
|
7 |
20 |
580 |
82.86 |
-40 |
140 |
Answer 3:
Step: 1 Payoff Matrix for Player A (Wal-World) and Player B (Tarbo) (Robinson & Goforth, 2005)
Step: 2 Figure out Player A’s best response to all of player B’s actions
Existing Strategy New Strategy
Since 4 > 3 and since 2 > 1
In this condition, Wal-World has a dominant strategy when, both companies implement existing strategy. At the same time, this company also has dominant strategy when, both companies implement new strategy in their companies.
Step 3: Figure out Player B’s best response to all of player A’s actions
Existing Strategy New Strategy
Since 4 > 3 and since 2 > 1
In this condition, Tarbo has a dominant strategy when, Wal-World company implements existing strategy and Tarbo implements new strategy simultaneously. At the same time, this company also has dominant strategy when, both companies implement new strategy in their companies.
Step 4: Nash equilibrium exists where, Player B’s best response is the same as Player
A’s best response
There is Nash equilibrium in this game because player B’s best response is the same as player A’s best response.
References
- Arnold, R. A. (2010). Microeconomics. USA: Cengage Learning.
- Boyes, W. & Melvin, M. (2010). Microeconomics. USA: Cengage Learning.
- Hall, R. E. & Lieberman, M. (2009). Microeconomics: Principles and Applications. USA: Cengage Learning.
- McEachern, W. A. (2011). Economics: A Contemporary Introduction. USA: Cengage Learning.
- Robinson, D. & Goforth, D. (2005). The topology of the 2×2 games: a new periodic table. USA: Routledge.