5) Explain how the joint profit-maximizing price of colluding firms under oligop

Question

5) Explain how the joint profit-maximizing price of colluding firms under oligopoly is determined? How about output?

6) Suppose there are only two countries, Iraq and Iran, producing oil in the world (so they are both oligopolists). Assume the leaders of the two countries believe he payoff to alternative oil production are as follows:

(a): when Iraq chooses high production, Iran?s best decision is

(a1) high production (a2) low production

(b): when Iraq chooses low production, Iran?s best decision is

(b1) high production (b2) low production

(c): given answers of (a) and (b), Iran?s dominant strategy is

(c1) high production (c2) low production

(d): by symmetry, Iraq?s dominant strategy is

(d1) high production (d2) low production

(e): the Nash equilibrium is____________

Explanation / Answer

When firms collude and jointly maximize profits, output is chosen where the marginal revenue, which is derived from the market demand schedule, and the combined marginal cost, which is the horizontal sum of the individual short-run marginal cost curves for the oligopolists, are equal. Firms set the price from the market demand curve at this level of output.

Related Questions

Navigate

• Browse (All)
• Browse 5
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.