Reference no: EM131114802

1. Provide a real-world example of a market that approximates each oligopoly setting, and explain your reasoning.

a. Cournot oligopoly.

b. Stackelberg oligopoly.

c. Bertrand oligopoly.

2. You are the manager of BlackSpot Computers, which competes directly with Condensed Computers to sell high-powered computers to businesses. From the two businesses' perspectives, the two products are indistinguishable. The large investment required to build production facilities prohibits other firms from entering this market, and existing firms operate under the assumption that the rival will hold output constant. The inverse market demand for computers is P = 5,900 - Q, and both firms produce at a marginal cost of $800 per computer. Currently, BlackSpot earns revenues of $4.25 million and profits (net of investment, R&D, and other fixed costs) of $890,000. The engineering department at BlackSpot has been steadily working on developing an assembly method that would dramatically reduce the marginal cost of producing these high-powered computers and has found a process that allows it to manufacture each computer at a marginal cost of $500. How will this technological advance impact your production and pricing plans? How will it impact BlackSpot's bottom line?

3. You are the manager of a small pharmaceutical company that received a patent on a new drug three year ago. Despite strong sales ($150 million last year) and a low marginal cost of producing the product ($0.50 per pill), your company has yet to show a profit from selling the drug. This is, in part, due to the fact that the company spent $1.7 billion               the drug and obtaining FDA approval. An economist has estimated that, at the current price of $1.50 per pill, the own price elasticity of demand for the drug is -2. Based on this information, what can you do to boost profits? Explain.

4. You are a manager at Spacely Sprockets- a small firm that manufactures Type A and Type B bolts. The accounting and marketing departments have provided you with the following information about the per-unit costs and demand for Type A bolts:

Materials and labor are obtained in a competitive market on an as-needed basis, and the reported costs per unit for materials and labor are constant over the rele­vant range of output. The reported unit overhead costs reflect the $10 spent last month on machines, divided by the projected output of 2 units that was planned when the machines were purchased. In addition to the above infonnation, you know that die firm's assembly line can produce no more than five bolts. Since the firm also makes Type B bolts, this means that each Type A bolt produced reduces the number of Type B bolts that can be produced by one unit; the total number of Type A and B bolts produced cannot exceed 5 units. A call to a rep­utable source has revealed that unit costs for producing Type B bolts are identi­cal to those for producing Type A bolts, and that Type B bolts can be sold at a constant price of $4.75 per unit. Detenninc your relevant marginal cost of producing Type A bolts and your profit-maximizing production of Type A bolts.