Economics 2023 Paper I 50 marks Explain

Q2

(a) Explain the Cournot model of duopoly using reaction functions and interpret it as a Nash equilibrium. (20 marks) (b) "Perfect competition is incompatible with increasing returns to scale." Examine the statement. (15 marks) (c) Describe a model of oligopoly that explains price stickiness. (15 marks)

हिंदी में प्रश्न पढ़ें

(a) प्रतिक्रिया फलनों का प्रयोग करते हुए कुर्नों के द्वयधिकार मॉडल की व्याख्या कीजिए तथा इसका नैश-संतुलन के रूप में निर्वचन कीजिए। (20 अंक) (b) "पूर्ण-प्रतियोगिता, पैमाने के बढ़ते प्रतिफल के साथ असंगत है।" इस कथन का परीक्षण कीजिए। (15 अंक) (c) अल्पाधिकार के एक ऐसे मॉडल की व्याख्या कीजिए जो निश्चल-कीमत की व्याख्या करता है। (15 अंक)

Evaluate your answer to this question → See all 2023 Economics questions

Directive word: Explain

This question asks you to explain. The directive word signals the depth of analysis expected, the structure of your answer, and the weight of evidence you must bring.

See our UPSC directive words guide for a full breakdown of how to respond to each command word.

How this answer will be evaluated

Approach

The directive 'explain' demands clear exposition with logical reasoning and causal mechanisms. Spend approximately 40% of word budget on part (a) given its 20 marks, 30% each on (b) and (c). Structure: brief introduction on market structures → part (a) with reaction function derivation and Nash equilibrium interpretation → part (b) examining the incompatibility thesis with graphical analysis → part (c) detailing kinked demand curve or menu cost model → conclusion synthesizing implications for competition policy.

Key points expected

  • Part (a): Derivation of Cournot reaction functions for two firms with linear demand and cost functions; intersection as Nash equilibrium where neither firm has incentive to deviate
  • Part (a): Mathematical derivation showing equilibrium output q1 = q2 = (a-c)/3b, total output 2/3 of monopoly output, price between monopoly and competitive levels
  • Part (b): Explanation of why increasing returns (falling LAC) leads to natural monopoly; incompatibility with P=MC condition under perfect competition
  • Part (b): Chamberlin's large group case vs. sustainable industry configuration; role of contestable markets as resolution
  • Part (c): Kinked demand curve model (Sweezy) with asymmetric price elasticity; price rigidity despite cost changes
  • Part (c): Alternative: Menu cost model (Mankiw) or implicit collusion/tacit coordination models explaining sticky prices
  • Integration: Comparison of Cournot equilibrium with competitive and collusive outcomes; welfare implications
  • Contemporary relevance: Digital platforms, network effects, and renewed debate on competition-innovation tradeoff

Evaluation rubric

DimensionWeightMax marksExcellentAveragePoor
Concept correctness25%12.5Precise definition of Cournot-Nash equilibrium as mutual best responses; correct exposition of why IRS creates market failure under perfect competition; accurate distinction between price stickiness mechanisms (kinked demand vs. menu costs vs. coordination failure)Basic understanding of duopoly equilibrium and IRS incompatibility but conflates Cournot with Bertrand or Stackelberg; vague explanation of price rigidity without specifying mechanismConfuses Nash equilibrium with Pareto optimality; states IRS compatible with perfect competition; describes price stickiness without oligopoly model
Diagram / model20%10Clear reaction function diagrams with labeled axes, 45° line reference, and stable equilibrium; downward-sloping LAC curve showing natural monopoly problem; kinked demand diagram with discontinuous MR and price rigidity rangeAttempted diagrams with correct general shapes but missing labels or incorrect intersection points; partial representation of modelsMissing diagrams for quantitative parts; incorrect slope of reaction functions (upward sloping); no graphical analysis of IRS incompatibility
Quantitative reasoning20%10Complete algebraic derivation of Cournot equilibrium quantities, price, and profits; comparison with monopoly (a-c)/2b and competitive (a-c)/b outputs; numerical illustration of welfare loss from IRS under competitionStates final Cournot formulas without derivation; mentions quantities are between monopoly and competition without showing mathematicallyNo mathematical working; purely verbal treatment of quantitative relationships; incorrect formulas
Indian / empirical examples15%7.5Specific Indian examples: telecom duopoly (Jio-Airtel) for Cournot analysis; natural monopoly cases like Indian Railways or power distribution; OPEC+ or domestic cement/steel price rigidity; references to CCI cases on tacit collusionGeneric references to 'Indian markets' without specificity; international examples only (OPEC, airline cartels)No empirical examples; purely theoretical treatment; irrelevant examples from non-oligopoly contexts
Policy implication20%10Critical evaluation of competition policy: when to regulate natural monopolies vs. promote competition; limitations of Cournot in dynamic industries; implications of price stickiness for monetary policy transmission; reference to Competition Commission of India jurisprudenceMentions antitrust policy generally without specific instruments; states government should intervene without specifying howNo policy discussion; ignores welfare and regulatory implications; concludes with description rather than evaluation

Practice this exact question

Write your answer, then get a detailed evaluation from our AI trained on UPSC's answer-writing standards. Free first evaluation — no signup needed to start.

Evaluate my answer →

More from Economics 2023 Paper I