ONLINECO 

Chapter 17. Oligopoly.Exercises 1-5 Gregory Mankiw. Principles of Economics. 7th edition.

 

1. A large share of the world supply of diamonds comes from Russia and South Africa. Suppose that the marginal cost of mining diamonds is constant at $1,000 per diamond and the demand for diamonds is described by the following schedule:

a. If there were many suppliers of diamonds, what would be the price and quantity?

b. If there were only one supplier of diamonds, what would be the price and quantity?

c. If Russia and South Africa formed a cartel, what would be the price and quantity? If the countries split the market evenly, what would be South Africa’s production and profit? What would happen to South Africa’s profit if it increased its production by $1,000 while Russia stuck to the cartel agreement.

d. Use your answers to part (c) to explain why cartel agreements are often not successful

 

2. The New York Times (Nov. 30, 1993) reported that “the inability of OPEC to agree last week to cut production has sent the oil market into turmoil . . . [leading to] the lowest price for domestic crude oil since June 1990.”

a. Why were the members of OPEC trying to agree to cut production?

b. Why do you suppose OPEC was unable to agree on cutting production? Why did the oil market go into “turmoil” as a result?

c. The newspaper also noted OPEC’s view “that producing nations outside the organization, like Norway and Britain, should do their share and cut production.” What does the phrase “do their share” suggest about OPEC’s desired relationship with Norway and Britain?

 

3. This chapter discusses companies that are oligopolists in the market for the goods they sell. Many of the same ideas apply to companies that are oligopolists in the market for the inputs they buy.

a. If sellers who are oligopolists try to increase the price of goods they sell, what is the goal of buyers who are oligopolists?

b. Major league baseball team owners have an oligopoly in the market for baseball players. What is the owners’ goal regarding players’ salaries? Why is this goal difficult to achieve?

c. Baseball players went on strike in 1994 because they would not accept the salary cap that the owners wanted to impose. If the owners were already colluding over salaries, why did they feel the need for a salary cap?

 

4. Consider trade relations between the United States and Mexico. Assume that the leaders of the two countries believe the payoffs to alternative trade policies are as follows:

a. What is the dominant strategy for the United States? For Mexico? Explain.

b. Define Nash equilibrium. What is the Nash equilibrium for trade policy?

c. In 1993, the U.S. Congress ratified the North American Free Trade Agreement, in which the United States and Mexico agreed to reduce trade barriers simultaneously. Do the perceived payoffs shown here justify this approach to trade policy? Explain.

d. Based on your understanding of the gains from trade (discussed in Chapters 3 and 9), do you think that these payoffs actually reflect a nation’s welfare under the four possible outcomes?

 

5. Synergy and Dynaco are the only two firms in a specific high-tech industry. They face the following payoff matrix as they decide upon the size of their research budget: a. Does Synergy have a dominant strategy? Explain b. Does Dynaco have a dominant strategy? Explain. c. Is there a Nash equilibrium for this scenario? Explain. (Hint: Look closely at the definition of Nash equilibrium.).