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Cournot Duopoly and Pricing Strategy

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1. Suppose that in a perfectly competitive industry the equilibrium industry quantity is 10,000 units. Suppose that the monopoly output is 5,000. For a 2-firm Cournot Oligopoly (N =2) known as a duopoly, what is a likely Cournot QUANTITY for the industry?
a. 3, 000 units
b. 5,000 units
c. 6,667 units
d. 10,000 units
e. 15,000 units

2. A manufacturer produces two types of computer software, Word processing (W) and Spreadsheet (S), which is offered to two different retail outlets (#1 and #2). The following table shows the maximum price each retail outlet is willing to pay for each individual software product.
Product W Product S
Retail #1 $170 $105
Retail #2 $95 $135
What is the optimal pricing strategy that will maximize revenue for the manufacturer, given the maximum the retail outlets are willing to pay?
a. Bundle both products (W and S) and sell them at $230.
b. Price product W at $170 and Product S at $135.
c. Price product W at $170 and Product S at $170.
d. Price product W at $95 and Product S at $105.
e. Bundle both products (W and S) and sell them at $275

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Solution Preview

1. Suppose that in a perfectly competitive industry the equilibrium industry quantity is 10,000 units. Suppose that the monopoly output is 5,000. For a 2-firm Cournot Oligopoly (N =2) known as a duopoly, what is a likely Cournot QUANTITY for the industry?
a. 3, 000 units
b. 5,000 units
c. 6,667 units
d. 10,000 units
e. 15,000 units

The Cournot equilibrium quantity always lies between the monopoly and competitive market equilibrium quantities. This is due to the fact that duopoly contains some ...

Solution Summary

Discussion of pricing strategy, bundling, and Cournot equilibrium

$2.19
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Dominant Strategies: Managerial Economics

12. The following payoff matrix represents the long-run payoffs for two duopolists faced with the option of buying or leasing buildings to use for production. Determine whether any dominant strategies exist and whether or not there is a Nash equilibrium.

Firm 1
Lease
Building Buy
Building
Lease F1 = 500 F1 = 750
Firm 2 F2 = 500 F2 = 400

Buy F1 = 300 F1 = 600

F2 = 600 F2 = 200

13. Suppose Market Demand is given by the demand function: . Suppose Marginal Cost is constant at MC=0. Find the Market Equilibrium price, quantity, and total profits to all firms in the market for each of the different market structures below

a. Monopoly

b. Stackelberg Duopoly

c. Cournot Duopoly

d. Pure Competition

14. Suppose There are three farmers (Farmer A and Farmer B and Farmer C). The current zoning allows the land to be used for any purpose. Farmer A has chosen Pig Farming. A Pig Farm will earn $50,000 profit, every year, forever.

a. Assume the interest rate is 10% per year. Using a present value equation--
(PV = Y/(1+r)n
What is the Pig Farm worth?

b. Suppose the next best use of Farmer A's property is residential, where it could earn $20,000 per year. What is the minimum one-time payment Farmer A would accept to agree to restrict his land for residential use forever?

c. Why would Farmer B agree to pay 60% of this cost (from question 14-b) and Farmer C would only pay 40%?

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