Problem 1: The American automobile industry has been an archetypical oligopoly. Show why this statement is true.
Problem 2: Explain the cutthroat competitors reasons for not raising or lowering his price, thereby accounting for the kink in his demand curve.
The cut-throat competitors' reason for not raising or lowering prices are that if a competitor increases his prices about the existing level, the other competitors will not follow and the firm that has increased the price will lose its market share to other competitors. On the other hand if the firm lowers its prices the competitors will also lower their prices to protect their market share and so the firm that has taken the initiative to reduce the price will only gain slightly by way of quantity sold. What happens in the kinked demand curve model is that the demand curve above the point of equilibrium is very elastic but the demand curve below the point of equilibrium is inelastic. The overall effect of the kinked demand curve is that prices remain rigid.
Problem 3: What are the basic provisions of a collective bargaining agreement? Explain the differences between meditation and arbitration.