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.
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.
Get Answers For Free
Most questions answered within 1 hours.