Question

5. The table below shows the town of NY’s demand schedule for gasoline. For simplicity, assume...

5. The table below shows the town of NY’s demand schedule for gasoline. For simplicity, assume the town’s gasoline seller(s) incur no costs in selling gasoline.

Quantity

(in gallons)

Price

Total Revenue

(and total profit)

0

$10

$0

100

9

900

200

8

1,600

300

7

2,100

400

6

2,400

500

5

2,500

600

4

2,400

700

3

2,100

800

2

1,600

900

1

900

1,000

0

0

Based on the table below, please find all of the following:

a. What will be the quantity of gasoline offered for sale, the price, and the profits earned by gas stations if the gas stations continue to compete over the long run?

b. What will be the quantity of gasoline offered for sale, the price, and the profits earned by gas stations if the gas stations acted as a cartel?

c. Suppose Citgo and Shell are the only two gasoline sellers in NY. At the moment, they are colluding and behave in unison as a monopolist would. Now, suppose Citgo decides to cheat Shell by producing an extra 100 gallons. Of course, the other firm may also resort to cheating. Set up a cheat/collude game with 2 players (Citgo and Shell) with all cells filled out with the two firms’ profits for each strategy choice. Then, find the Nash Equilibrium of this game.

Homework Answers

Answer #1

A. In competition in long run, price=marginal cost

Thus price in long run would be 0.

Total quantity sold =1000 and profit is each firm=0

b. If they act as a cartel then they will behave like a profit maximising firm and

price would be 5 and each firm produces 250 unit of output and profit of each firm=1250

c. If citgo cheats then new quantity=600 and price will reduced to 4. And profit=350*4=1400

Firm 1/firm 2 cheat Collude
Cheat (1050,1050) (1400,1000)
Collude (1000,1400) (1250,1250)

Cheat is a dominant strategy for both players in the above game

thus (Cheat, Cheat) is a Nash equilibrium and will be the outcome of the above game.

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