The above figure shows the reaction functions for two pizza shops in a small isolated town. Compare the Cournot, Stackelberg, cartel, and competitive equilibria in terms of total output and welfare
What will be an ideal response?
If both firms are competitive price takers, they both produce 100 units, for a total of 200 units. As a cartel, they jointly produce a total of 100 units. If they behave as Cournot firms, they each produce 66.67 units, for a total of 133.33 units. If one firm is a Stackelberg leader, it produces 100 units and the follower produces 50 units, for a total of 150. In terms of output, and therefore social welfare, the structures are ranked as competitive, Stackelberg, Cournot, cartel.
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A firm combines two resources, X and Y, to produce an output level Q in a purely competitive market. The cost of a unit of X is $15 and the cost of a unit of Y is $8. The marginal product of X is 30 units and the marginal product of Y is currently 24
units at output level Q. What would you recommend that the firm do given this resource combination? What will be an ideal response?