Question

Box 1 Options: (Price takers) (Monopolistically Competitive firms) (price makers)

Box 2 Options: (Supply) (Demand) (Average total cost)

Consider Kellogg's production and price choices in the breakfast cereal industry when it is characterized by the price leadership model price makers Therefore, the horizontal Under this theory of oligopoly, all firms other than the dominant firm act as sum of their marginal cost curves is their curve The following graph shows the market demand curve and the horizontal sum of the marginal cost curves of all firms other than the dominant firm: 24 Demand 22 20 18 16 14 12 10 8 6 4 Supply (MC of Other Firms) 0 0 20 40 60 80 100 120 140 160 180 200 220 240 QUANTITY (Millions of boxes of cereal per year) Price (Dollars per box cereal) 24 22 DF Demand 20 18 16 Marginal Revenue 14 12 10 8 6 2 MC of Dominant Firm 0 20 40 60 80 100 120 140 160 180 200 220 240 QUANTITY (Millions of boxes of cereal per year) This graph also shows the dominant firm's marginal cost curve. Given that cost curve, as well as the demand and marginal revenue curves you derived, the price of a box of cereal will be under the price leadership model. Price (Dollars per box of cereal)

Answer 1

Under the theory of oligopoly, all other firms than the dominant firm act as PRICE TAKERS, they take the price set by dominant firm as given and select their quantity at that price.

Therefore, the horizontal sum of their marginal cost curves is their SUPPLY curve.

The price of box of cereal will be determined where the MR curve is equal to the MC curve of the dominant firm. This happens at quantity 50. At this quantity,the price would be at 19. (As happens in the monopolistic market, equilibrium price is determined where equilibrium quantity touches the AR/demand curve). Thus, price is 19.

The MR is derived below, the diagram is hand drawn and thus not perfectly scaled.

HRATRAe Psrtice TRCPKO) uartity Q4 410 22 2 18 40 0801 R8D 14 18 10 16 80 6 1400 19 (00 1440 12 -2 1y00 10 140 -6 R80 J 60 136 6 l080 10 -14 200 -18 440 D 12

$4 .MR 22 Mcof deminand frm 20 16 12 10 20 40 60 ICO /20 140 16o 180 20 220 24