Page 223 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes In particular, if the firms 1 and 2 choose levels of advertising n ≥ 0 and n ≤ 0, respectively,

1 2
fi rm i attracts fraction
n + 1/2
i
n + n + 1
1
2

of total demand. For example, if no firm does advertising, (n = n = 0) each firm attracts half

1 2
of total demand. The cost of advertising at level ni is equal to (½) .
ni

(a) Describe the profit function of each firm as a function of levels of advertising.

(b) Calculate the first order condition for a firm that has to be satisfied when it maximizes
its profi ts.

(c) What is the optimal level of advertising for firm 1 when firms 2 sets n = 7?
2
6. ‘Oligopoly is the most prevalent form of market structure in the manufacturing sector’.
Describe this statement with the help of an example.

7. Assume that firms in the short-run are earning above normal profits. Explain what will

happen to these profits in the long-run for the following markets:
(a) Pure Monopoly
(b) Oligopoly
(c) Monopolistic Competition
(d) Perfect Competition
8. The following list is a number of well-known companies and their products. Which of
the four types of markets (perfect competition, monopoly, monopolistic competition and
oligopoly) best characterize the markets in which they compete? Explain why.
(a) Mcdonald’s-hamburgers.
(b) exxon-gasoline.
(c) IBB-personal computers
(d) Heinz

9. Comment on the following statements with logical reasoning and appropriate diagrams.
(a) In oligopoly, there is no one single determinate solution, but a number of determinate
solutions depending upon different assumptions.

(b) The success of price leadership of a firm depends upon the correctness of his estimates
about the reactions of his followers.
(c) The kinked demand curve theory explains why a price once determined would
remain sticky but does not determine that price level.
(d) The Curnot model assumes a duopoly but is not extendable to multiform oligopoly.
10. Discuss with the help of diagram the non-collusive models of oligopoly.
11. Why might oligopolists be more likely to match a price cut than a price increase by a
competitor?
12. What is price leadership? Explain price leadership with the help of real world examples.
13. As a manager, what might be the different types of barriers to entry an oligopoly? How
will you react and what will be your different ways of strategic behaviour for entry?

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