1. Assume a market that operates for two periods. Its demand is q = 12-p per period. a) Firm I is the only firm in the market in period 1. It has a fixed cost of 1 per period and a constant marginal cost of 6 given its current technology. Calculate its profit maximizing price, quantity, and profit. b) Firm E wishes to enter the market in the next period. Assume that its costs are identical to Firm I's period 1 costs. Suppose that it enters the market and firms engage in quantity competition. What is each firm's profit maximizing price, quantity, and profit in period 2? c) Firm I has the opportunity to lower its marginal cost by 2 through R&D in period 1 before Firm E enters. If it does so and Firm E does not enter, what is each firm's equilibrium price, quantity, and profit in period 2? d) Will Firm E enter if Firm I invests in R&D? Calculate each firm's equilibrium price, quantity, and profit in period 2? e) What is the maximum sunk cost that Firm I would be willing to incur for R&D? f) Assume that Firm I goes ahead with R&D. What is the equilibrium outcome of the market?
1. Assume a market that operates for two periods. Its demand is q = 12-p per period. a) Firm I is the only firm in the market in period 1. It has a fixed cost of 1 per period and a constant marginal cost of 6 given its current technology. Calculate its profit maximizing price, quantity, and profit. b) Firm E wishes to enter the market in the next period. Assume that its costs are identical to Firm I's period 1 costs. Suppose that it enters the market and firms engage in quantity competition. What is each firm's profit maximizing price, quantity, and profit in period 2? c) Firm I has the opportunity to lower its marginal cost by 2 through R&D in period 1 before Firm E enters. If it does so and Firm E does not enter, what is each firm's equilibrium price, quantity, and profit in period 2? d) Will Firm E enter if Firm I invests in R&D? Calculate each firm's equilibrium price, quantity, and profit in period 2? e) What is the maximum sunk cost that Firm I would be willing to incur for R&D? f) Assume that Firm I goes ahead with R&D. What is the equilibrium outcome of the market?
Chapter12: The Partial Equilibrium Competitive Model
Section: Chapter Questions
Problem 12.9P
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Transcribed Image Text:1. Assume a market that operates for two periods. Its demand is q = 12-p per period.
a) Firm I is the only firm in the market in period 1. It has a fixed cost of 1 per period and
a constant marginal cost of 6 given its current technology. Calculate its profit
maximizing price, quantity, and profit.
b) Firm E wishes to enter the market in the next period. Assume that its costs are
identical to Firm I's period 1 costs. Suppose that it enters the market and firms engage
in quantity competition. What is each firm's profit maximizing price, quantity, and
profit in period 2?
c) Firm I has the opportunity to lower its marginal cost by 2 through R&D in period 1
before Firm E enters. If it does so and Firm E does not enter, what is each firm's
equilibrium price, quantity, and profit in period 2?
d) Will Firm E enter if Firm I invests in R&D? Calculate each firm's equilibrium price,
quantity, and profit in period 2?
e) What is the maximum sunk cost that Firm I would be willing to incur for R&D?
f) Assume that Firm I goes ahead with R&D. What is the equilibrium outcome of the
market?
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