Summary 385where QWdenotes the quantity of oil (in millions of barrels per day) and P is
price per barrel. OPEC’s economists also recognize the importance of non-
OPEC oil supplies. These can be described by the estimated supply curve
QS .5P 10.
a. Write down OPEC’s net demand curve.
b. OPEC’s marginal cost is estimated to be $20 per barrel. Determine
OPEC’s profit-maximizing output and price. What quantity of oil is
supplied by non-OPEC sources? What percentage of the world’s total
oil supply comes from OPEC?- Firm A is the dominant firm in a market where industry demand is
given by QD 48 4P. There are four “follower” firms, each with
long-run marginal cost given by MC 6 QF. Firm A’s long-run
marginal cost is 6.
a. Write the expression for the total supply curve of the followers (QS)
as this depends on price. (Remember, each follower acts as a price
taker.)
b. Find the net demand curve facing firm A. Determine A’s optimal
price and output. How much output do the other firms supply in
total? - Two firms serve a market where demand is described by P 120 5(Q 1
Q 2 ). Each firm’s marginal cost is 60.
a. Suppose each firm maximizes its own profit, treating the other’s
quantity as constant. Find an expression for firm 1’s optimal output as
it depends on firm 2’s. In equilibrium, what common level of output
will each firm supply?
b. Suppose, instead, that the firms collude in setting their outputs. What
outputs should they set and why? - Firms M and N compete for a market and must independently decide
how much to advertise. Each can spend either $10 million or $20 million
on advertising. If the firms spend equal amounts, they split the $120
million market equally. (For instance, if both choose to spend $20
million, each firm’s net profit is 60 20 $40 million.) If one firm
spends $20 million and the other $10 million, the former claims two-
thirds of the market and the latter one-third.
Firm N’s Advertising
$10 million $20 million
$10 million ?,? ?,?
Firm M’s Advertising
$20 million ?,? 40, 40c09Oligopoly.qxd 9/29/11 1:32 PM Page 385