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Economics Homework Nine - Model (view source)
Revision as of 20:13, November 18, 2009
, 20:13, November 18, 2009→Honors: better
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:Teacher's Note: Unfortunately, there is a mistake in the ''ordering'' of the paired numbers used in this problem, which I realized only after grading the answers. The numbers were in the wrong order because a firm's profits should increase, not decrease, when it increases output in an oligopoly. All students correctly realized that the equilibrium must be where the profits are equal, either (50,50) or (75,75). As mistakenly written above, we can start from (50,50) and realize that one of the firm's can increase its profits by reducing output, which takes us to (25,100). But then the other firm can increase its profits by reducing output, which takes us to equilibrium at (75,75). Any movement away from that point would start of chain of events that would lead back to that point, so it is a true equilibrium. But that is an uninteresting solution, and unrealistic in a free market.
:Teacher's Note: Unfortunately, there is a mistake in the ''ordering'' of the paired numbers used in this problem, which I realized only after grading the answers. The numbers were in the wrong order because a firm's profits should increase, not decrease, when it increases output in an oligopoly. All students correctly realized that the equilibrium must be where the profits are equal, either (50,50) or (75,75). As mistakenly written above, we can start from (50,50) and realize that firm B can increase its profits by reducing output, which takes us to (25,100). But then the other firm can increase its profits by reducing output, which takes us to equilibrium at (75,75). Any movement away from that point would start of chain of events that would lead back to that point, so it is a true equilibrium. But that is an uninteresting solution, and unrealistic in a free market.
:The chart should have had the ordered pairs reversed:
:The chart should have had the ordered pairs reversed:
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:In the corrected version above, from the point (50,50) neither firm can increase its own profits by reducing its own output. So that is equilibrium. To check the answer, we can start from (75,75). From there, either firm can increase its profits by increasing its output, and it does. But from the new point the other firm can increase its profits by increasing its output, and the market ends up at where both firms have have increased their output, with profits of (50,50). Spend a few minutes trying each approach to confirm that is the equilibrium. (Teacher)
7. Monopolies: should the government regulate them? Or is regulation worse?
7. Monopolies: should the government regulate them? Or is regulation worse?