University of Ghana Business School
FINC 304: Managerial Economics - 2022/2023
Tutorial Set 4
QUESTION 1
There are 10 banks competing in a local market. Each of the ten banks has a 10 percent market share.
a) Compute a four-firm concentration ratio and explain your answer.
b) Compute a five-firm concentration ratio and explain your answer.
c) Compute a Herfindahl-Hirschman Index (HHI) for 8 of the firms and explain your
answer.
QUESTION 2
Two firms in a homogeneous-product duopoly market (firm 1 and firm 2) have the
following cost and demand functions: TC1=4q1; TC2=4q2 and Q=40-P; Q=q1+q2.
a) Derive the reaction function/best-response function for each firm.
b) Assume that the firms play a simultaneous move game. Characterize the Nash
Equilibrium (quantities, price, and profit for each firm).
c) Suppose the two firms play a sequential game with the following timing of events:
1. Firm 1 chooses an output
2. Firm 2 observes Firm 1’s output and then chooses its output
Characterize the Nash equilibrium of this sequential move game.
QUESTION 3
The market for palm oil in Ghana consists of two firms (Twifo Oil Ltd and Benso Oil Ltd)
that produce identical products. Competition in the market is such that each of the firms
acts independently in producing its profit-maximising output, and these quantities of output
are then sold in the market at a price that is determined by the total amount produced by
the two firms. Benso Oil Ltd is known to have a cost advantage over Twifo Oil Ltd. A
recent study by Freddy Consult found that the market demand curve faced by the two firms
is P = 280 – 2(QT + QB) and costs are CT (QT) = 3QT and CB (QB) = 3QB where CT and QT
Teaching Assistant: Frederick R. Yorke
are total cost and quantity for Twifo Oil Ltd respectively and CB and QB are total cost and
quantity for Benso Oil Ltd respectively.
a) Determine the marginal revenue function for each firm.
b) Determine the reaction function for each firm.
c) How many outputs will each firm produce in equilibrium?
d) What are the equilibrium profits for each firm?
e) Based on its cost advantage nature, Benso Oil Ltd now becomes the market leader
while Twifo Oil Ltd becomes the follower.
i) Determine the equilibrium output level for both the leader and the follower.
ii) What is the profit for the leader and the follower?
QUESTION 4
Suppose an industry comprises two firms (firms A and B) producing homogeneous
products in an oligopoly market. The inverse market demand is P = 100 – 2(QA + QB),
where QA and QB are the products of firm A and firm B respectively. The total cost
functions for the two firms are: CA(QA) = 12QA and CB(QB) = 20QB.
(a) Explain the concept of reaction function in this oligopoly market.
(b) Derive the reaction function for each firm.
(c) Suppose the two firms play a simultaneous-move game where each firm assumes
that the firm will hold its output at the present level. Determine the equilibrium price
and calculate each firm’s equilibrium output and profit.
(d) Now suppose the two firms play a sequential-move game. Firm A which knows
more about the market conditions, chooses its output first before firm B chooses its
output. Determine the equilibrium price and calculate each firm’s equilibrium
output.
(e) What will be the equilibrium price and quantity in a perfectly competitive market?
(f) Would consumers prefer the market in c), d) or e)? Explain.
Teaching Assistant: Frederick R. Yorke
QUESTION 5
The inverse market demand in a homogeneous-product Cournot duopoly is P=100 -
2(Q1+Q2) and the cost functions are C1(Q1) =12Q1 and C2(Q2) = 20Q2.
a) Determine the reaction function for each firm
b) Calculate each firm’s equilibrium output, market price and profit
c) Assume that firm 2 is a leader and firm 1 is a follower, what is the equilibrium
price, profit-maximizing output levels and profits for each firm?
d) What will be the equilibrium price and quantity in a perfectly competitive market?
e) Would consumers prefer the market in b), c), or d)? Explain.
QUESTION 6
Two firms in a homogeneous-product duopoly market (firm 1 and firm 2) have the
following cost and demand functions: TC1=4q1; TC2=4q2 and Q=100-0.5P; Q=q1+q2.
a) Set up the profit function for each.
b) Derive the reaction function/best-response function for each firm.
c) Assume that the two firms play the following simultaneous-move game: Both firms
choose their output simultaneously assuming the other firm will maintain its output
at the current level. Determine the equilibrium quantities, price and profit for each
firm.
d) Assume now that the two firms play the following sequential-move game: Firm 1
knows more about market conditions and chooses its output first. Firm 2 then
chooses its optimal output. Determine the equilibrium quantities, price and profit
for each firm.
e) Assume there was only one firm in the industry. Determine the equilibrium
quantities, price and profit for this firm.
f) Would consumers prefer the market in c), d) or e)? Explain.
Teaching Assistant: Frederick R. Yorke
PART B
QUESTION 1 (Demand Analysis)
Michael Donkoh Corp estimates that its demand function is as follows:
Q= 300- 10P+ 20A+ 8P*+ 15Y
Where Q is the quantity demanded per month, P is the price of the product, A is the firm’s
advertising cost, Y is the per capita disposable income, and P* is the price of the product
of Bonaventure Corp.
a) During the next ten years, per capita disposable income is expected to increase by $
2000. What effect will this have on the firm’s sales?
b) If Michael Donkoh Corp intends to increase its price by enough to offset the effect
of the increase in income, by how much must it increase its price?
c) If Michael Donkoh Corp increases its price by this amount in b), will it increase or
decrease the PED? Explain.
d) What can be said about the relationship between the products of Michael Donkoh
Corp and Bonaventure Corp? Explain your answer.
e) What effect would an increase in advertising cost by $800 have on the profitability,
if each additional unit costs $ 12 to produce?
f) If next year Michael Donkoh Corp intends to charge $ 3 and spend $ 9000 per month
on promotion, while it believes that per capita income will be $11000 and
Bonaventure Corp’s price will be $5, calculate the income elasticity of demand.
What does this tell you about the nature of Michael Donkoh’s product?
Teaching Assistant: Frederick R. Yorke
