IAI May 2012 Q26

[dextar]

Assume that pricing at marginal cost would result in an industry output of 600 units. For a
Cournot oligopoly with five firms, the equilibrium industry output would be
A. 300 units
B. 500 units
C. 720 units
D. 150 units

Can anyone tell me how to approach this?

 

[Margaret Wood]

This is not part of Core Reading! The textbook only covers the Cournot model of duopoly; this question asks about a five-firm oligopoly.

Assuming the marginal cost is constant, the total output would be n/n+1 of the output under perfect competition (where n is the number of firms in the oligopoly). Perfect competition results in the social optimum, ie the output where price = marginal cost. We are told that the social optimum is 600, so we know that a five-firm oligopoly will produce 5/6 of this, ie 500.

 

[Sanjay]

This is not part of Core Reading! The textbook only covers the Cournot model of duopoly; this question asks about a five-firm oligopoly.

Assuming the marginal cost is constant, the total output would be n/n+1 of the output under perfect competition (where n is the number of firms in the oligopoly). Perfect competition results in the social optimum, ie the output where price = marginal cost. We are told that the social optimum is 600, so we know that a five-firm oligopoly will produce 5/6 of this, ie 500.

Ma'am the Institute always ends up asking questions which are beyond the Core Reading and this is extremely frustrating. I have written to IAI but they never got back to me (which is typical of them). Can the IFoA do something about this?

Kind Regards
Sanjay