Managerial Economics – HW 6

Name:_____________________ Must Show Work for Full or Partial Credit

Question 1: Sweezy Oligopoly

Part A: Graph the demand curve and the marginal cost curve of a company operating under a Sweezy

Oligopoly.

Part B: Explain how economists identify the point where the demand curve kinks.

Question 2: Cournot & Stackelberg

Part A: Graph the best response function for two companies operating under a Cournot Oligopoly.

Part B: Graph the output of two firms during Stackelberg competition.

Question 3: Insurance

Part A: Explain why insurance companies cannot insure when there is uncertainty.

Part B: Explain two ways insurance companies help companies make more cost effective decisions.

Name:_____________________ Must Show Work for Full or Partial Credit

Question 1: Sweezy Oligopoly

Part A: Graph the demand curve and the marginal cost curve of a company operating under a Sweezy

Oligopoly.

Part B: Explain how economists identify the point where the demand curve kinks.

Question 2: Cournot & Stackelberg

Part A: Graph the best response function for two companies operating under a Cournot Oligopoly.

Part B: Graph the output of two firms during Stackelberg competition.

Question 3: Insurance

Part A: Explain why insurance companies cannot insure when there is uncertainty.

Part B: Explain two ways insurance companies help companies make more cost effective decisions.

Answered Same DayDec 06, 2021

1

48638

1 a. Demand Curve

Price

P1

Elasticity >1

D

P0

K

P2

Elasticity <1

D’

Q2

Q1

Q0

Quantity

0

Fig. 1 Demand Curve

Price

D

MC2

P0

K

MC1

MR

D’ (AR)

Q2

Q0

Quantity

0

Fig. 1 Marginal Cost Curve

Change in marginal cost reduces the output. MC1 is the initial cost curve and MC2 is the revised marginal cost curve.

1 b. If the firm increases the price then the competitors will not increase the price and the demand faced the firm is elastic which is shown by the part KD in the above diagram. The quantity demanded is very sensitive to price in this case. Now, if the firm lowers the price, then the competitors will match the price change and the firm will not get as much as customers as expected due to the price decline. Thus, the demand curve faced by the firm will be inelastic. Thus, the demand curve faced here will be KD’. Thus the whole demand curve will be DKD’.

2 a. The best response function also known as the reaction function highlights the optimal...

48638

1 a. Demand Curve

Price

P1

Elasticity >1

D

P0

K

P2

Elasticity <1

D’

Q2

Q1

Q0

Quantity

0

Fig. 1 Demand Curve

Price

D

MC2

P0

K

MC1

MR

D’ (AR)

Q2

Q0

Quantity

0

Fig. 1 Marginal Cost Curve

Change in marginal cost reduces the output. MC1 is the initial cost curve and MC2 is the revised marginal cost curve.

1 b. If the firm increases the price then the competitors will not increase the price and the demand faced the firm is elastic which is shown by the part KD in the above diagram. The quantity demanded is very sensitive to price in this case. Now, if the firm lowers the price, then the competitors will match the price change and the firm will not get as much as customers as expected due to the price decline. Thus, the demand curve faced by the firm will be inelastic. Thus, the demand curve faced here will be KD’. Thus the whole demand curve will be DKD’.

2 a. The best response function also known as the reaction function highlights the optimal...

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