Demand Curves (2.5 points) 1. Given the ability of a monopolist to price cost fl

Question

Demand Curves (2.5 points) 1. Given the ability of a monopolist to price cost fluctuations immediately, would he/she prefer high volatility or low volatility? Why? 2. Would a pair of competing duopoly firms prefer symmetric or asymmetric volatility? W (Hint for Q1: model demand as linear, costs as linear, and cost fluctuation as cost being high with 50% probability an with 50% probability. Model low volatility as costs being half-way between high and low costs with 100% probability. Calculated expected profits and compare.)

Explanation / Answer

Volatility measures the risk of a security . It is used in option pricing formula to gauge the flucatuations in the returns of the underlying assedts. Volatility indicates the pricing behavior of the security . The price of a security fluctuate rapidly in a short time span it is termed to have high volatility. The prices of a security fluctuate slowly in a longer time span it is termed to have low volatility 2) duopoly concerned mainly symmetric volatile in the sense of homogeneous firms or equal firms so there is a competitive advantage for the low cost firm

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