Potential reactions of rivals
Game theory can be used to demonstrate that oligopolists:Answer a. rarely consider the potential reactions of rivals.
a. experience economies of scale.
b. may be either homogeneous or differentiated.
c. can increase their profits through collusion.
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Calculate the Lerner Index for the monopoly described in the question above.
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Specifically, would the new long-run equilibrium price above, below, or equal to the short run equilibrium price in part b? Is it possible for the new long-run equilibrium price to be above the original long-run equliibrium price? Explain.
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