Question

Question No. 1

You have been asked by the Head of the Oil Group at the Federal Trade Commission to assess whether the upstream portion of the oil industry faces insufficient concentration. She has told you that you may assume demand for crude oil is given by P=a-bq and that firms in this industry face a cost function given by C=cq+F.

a) Briefly describe the type of activity defined as “upstream”.

b) Prove mathematically that a monopolist will charge a higher price than a firm operating in a competitive market (in other words show me the monopoly price and quality and the competitive price and quantity and explain which qmpc).

c) Assume that the oil market characterized by Cournot Oligopoly of N firms. , as N approaches ∞, P and Q will approach the competitive outcome

d) Show that in the Cournot market as N approaches 1 P and Q from part (c) will approach the P and Q from part (a)

e) Briefly discuss the empirical analysis you might collect to assess whether the upstream portion of the market has characteristics consistent with competition, monopoly or some intermediate form.

Answer 1