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Economics Review Questions: Oligopoly and Game Theory

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Do the firms in an oligopoly act independently or interdependently? Explain your answer.

A monopolistically competitive firm has the following demand and cost structure in the short run:

OutPut Price FC VC TC TR Profit/Loss

0 $90 $90 $0 _ _ _
1 80 _ 40 _ _ _
2 70 _ 80 _ _ _
3 60 _ 140 _ _ _
4 50 _ 220 _ _ _
5 40 _ 320 _ _ _
6 30 _ 440 _ _ _
7 20 _ 580 _ _ _

a. Complete the table.
b. What level of output maximizes profit or minimizes loss?
c. Should this firm operate or shut down in the short run? Why?

3. Suppose that Wal-World and Tarbo are independently deciding whether to implement a new bar code technology. It is less costly for their suppliers to use one system and the following payoff matrix shows the profits per year for each company resulting from the interaction of their strategies.

a. Briefly explain whether Wal-World has a dominant strategy.
b. Briefly explain whether Tarbo has a dominant strategy.
c. Briefly explain whether there is a Nash equilibrium in this game.

(the attachment is for question 3)

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1. Interdependently. That means that actions taken by one firm have an impact on all the other firms in the industry. Each firm's market share is so large that any increase in market share will hurt its competitors. The result is that all ...

Solution Summary

This solution gives detailed answers to three microeconomics review questions about oligopoly, monopolistic competition, game theory and Nash equilibria.

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Economics

You have been contracted by an economic consulting firm to determine the economic structure and possible future actions of OPEC, the Organization of Petroleum Exporting Countries.

Using the Library, the Internet, and your course materials, find websites that offer this information and answer the following questions (Perloff, 2007).

Explain the difference between a monopoly and an oligopoly,and a cartel.
Provide an example of a monopoly, an oligopoly, and a cartel.
Discuss the welfare effects of monopolies and oligopolies.
Explain the game theory.
Using your own words, discuss the economic purpose of OPEC. What has happened to oil prices over the past five years?
Based on your answers to the above questions, synthesize the information you have gathered and tell the economic consulting firm which actions you think OPEC will take over the next year.
Summarize your research findings in 2 to 4 pages.

Reference

Perloff, J. M. (2007). Microeconomics (4th ed.). New York: Pearson Addison Wesley.

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