Answers to Back-of-the-Chapter Problems
1. The conventional wisdom points to entry in loose oligopolies for two
reasons: i) the market offers positive economic profits (unlike a
2. a. Before the acquisition, the top four firms accounted for 82% of the
market. After the merger, the former fifth-place firm is included in the
The “new” HHI is:
b. The increase of 649 points in a moderately concentrated market would
definitely trigger close antitrust scrutiny. Alternatively, if T-Mobile were
c. Mergers frequently generate efficiency benefits (in this case a more
seamless call system and better service). Keep in mind, however, that
parties to a merger always claim efficiency benefits, so the question is
3. a. OPEC’s net demand curve is: QN = QW – QS = (96 – .2P) – (.3P + 26) =
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b. Setting MR = MC, we have 140 – 4QN = 20, or QN = 30 million barrels
4. a. Each follower maximizes its profit by setting P = MC = 6 + QF. Thus,
b. The net demand curve of Firm A (the dominant firm) is:
5. a. For Firm 1, MR1 = MC implies 120 – 5Q2 – 10Q1 = 60, or Q1 = 6 – .5Q2.
b. If the firms collude, they set MR = 120 – 10Q = 60, or Q = 6 units. With
6. a. The payoff table is
Firm N
Firm M $10 million $20 million
b. Each firm’s dominant strategy is to spend $20 million on advertising.
c. If the firms could agree to limit spending to $10 million each, their
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7. a. Yes, there is a prisoner’s dilemma in the sense that when all farmers
b. If each member’s compensation is based on the team’s overall
performance, there is the incentive to take a “free ride” on the efforts of
8. a. For the union, hiring a lawyer is a dominant strategy – that is, it offers
b. Yes, this is a prisoner’s dilemma. Both sides are inevitably led to hire
9. a. For firm 1, P1 = 75 + .5P2 – Q1. Setting MR1 = MC, we have 75 + .5P2 –
c. Solving P1 = 52.5 + .25P1, we find P1 = P2 = $70. From the demand
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10. a. If Firm 2 cuts price to $67, Firm 1’s best response is: P1 = 52.5 + (.25)
(67) = $69.25. Putting these prices into Firm 2‘s demand curve,
we find that Firm 2 sells 42.625 units, generating a total profit equal to
b. As price leader, firm 2 is pursuing a soft “puppy dog” strategy. By
11. a. Rearranging the price equation shows that raising A increases sales.
b. Setting MR = MC, we have 50 + A.5 – 2Q = 20 or Q = 15 + .5A.5.
c. = (P – 20)Q – A = (15 + .5A.5)(15 + .5A.5) – A = 225 + 15A.5 – .75A.
12.* a. We can write equation 10.7 as:
after dividing each side by the last bracketed term. In the text example,
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b. Divide the optimal price equation by the optimal advertising equation
and cancel the common term (P – MC). The resulting expression is
c. To justify a much higher advertising ratio, Kellogg’s sales must be very
Appendix Problems
1. Chez Pierre’s pure bundling strategy is profitable if diners’ preferences
2. The optimal individual prices are PX = 20 and PY =20. The optimal
bundled price is PB = $28, implying a total profit of (28 – 20)(3) = 24.
Spreadsheet Problems
S1. a. and b. For the typical small firm, MC = dC/dQ = 2q – 4. Setting P =
MC, we have P = 2q – 4, or equivalently: q = .5P + 2. With 8 small
c. We can invoke the spreadsheet optimizer to determine the leader’s
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S2. a. With advertising spending fixed at A = 50, the firm maximizes its profit
b. Now let us maximize profit, varying both A and Q. The optimal
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