Micro-economics

Monopoly and Monopsony Section question

wo rms, ABC and XYZ, produce luxury sheepskin auto seat covers. Each rm has a cost function given by: C(q) = 25q + 2q2. The market demand for these seat covers is represented by the inverse demand equation: P = 400 5Q, where Q = q1 + q2. a) If each rm acts to maximize its prots, taking its rival's output as given (i.e., the rms behave as Cournot oligopolists), what will be the equilibrium quantities selected by each rm? What is total output, and what is the market price? What are the prots for each rm? b) It occurs to the managers of ABC and XYZ that they could do a lot better by colluding. If the two rms collude, what will be the prot-maximizing choice of output? The industry price? The output and the prot for each rm in this case? 0) The managers of these rms realize that explicit agreements to collude are illegal. Each rm must decide on its own whether to produce the Coumot quantity or the cartel quantity. To aid in making the decision, the manager of ABC constructs a payoff matrix like the one below. Fill in each box with the prot of ABC and the prot of XY Z. Given this payoff matrix, what output strategy is each rm likely to pursue? Payoff Matrix XYZ Produces XYZ Produces with Profits Cournot quantity cartel quantity ABC produces Cournot quantity ABC produces cartel quantity d) Suppose ABC can set its output level before XYZ does. How much will ABC choose to produce in this case? How much will XYZ produce? What is the market price, and what is the profit for each firm? Is ABC better off by choosing its output first? Explain why or why not