Productive efficiency
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1. Oligopoly
Exhibit 1 shows demand and cost conditions for a firm in an oligopoly market. Replicate the graph. Use the diagram to answer the following questions.
a. If the firms in this industry were to compete, what would be the resulting market price and quantity? Use dashed lines as a hint. Label Price as P1 and Quantity as Q1.
b. If the firms in this industry were to successfully collide, what would be the resulting market price and quantity? Use dashed lines as a hint. Label Price as P2 and Quantity as Q2.
c. Form society's standpoint, which outcome (part a. or part b.) is efficient? Justify your answer in 1 sentence and use the graph to persuade me that you understand what is going on.
d. Explain in 1 sentence under what conditions MC can be equal to ATC.
(see diagram in attachment)
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Solution Summary
Productive efficiency is determined.
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Oligopoly-answers:
a) If the firms in the industry were to compete, the price & output will be more or less stable. Because the rivals will match price cuts but not price increases. Thus, each firm views its demand curve as inelastic for price cuts (inelastic below the current price) and elastic for price increases (elastic above the current price). Thus, non-colluding firms will not wish to raise prices. ...
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