NAME _________________________________________

Economics 331: Intermediate Microeconomics                                                          Fall 2006

Oligopoly Problem Set                                                                                             dr Bob Horn

This multi-part problem is an excellent review tool for all we have covered on market types.

Bartels and Jaymes are two individuals who one day discover a stream that flows wine cooler instead of water. Bartels and Jaymes decide to bottle and sell the wine cooler. The marginal cost of bottling wine cooler and the fixed cost to bottle it are both zero. The market demand for bottled wine cooler is:

P = 90 - 0.25 Q

where Q is the total quantity and P is the market price of bottled wine cooler.

1. what is the economically efficient quantity and price of bottled wine cooler?
2. if Bartels and Jaymes were to collude with each other and produce the profit maximizing monopoly quantity, how much and at what price would they put on the market?
3. at the output level in (b) what is the welfare loss compared with (a)?
4. suppose the two decide to act as Cournot duopolists, what are the reaction functions for each of them?
5. what will be the Cournot equilibrium price and output for bottled wine cooler?
6. suppose James acts as the leader. Assuming Stackelberg behavior how much will the leader produce? the follower? What will be the market price?
7. suppose now another producer of cheap bottled wine, Paul Mason, discovers the stream and begins to compete with Bartels and Jaymes. What will be the Cournot equilibrium price and quantity with three firms in the market?
8. suppose (finally) the B and J act as Bertrand competitors? What will be the equilibrium price and quantity?