1. Two companies produce similar items for the same market. Company 1 produces q1 items and Company 2 produces 42 items. The costs, C, and C2, incurred by Company 1 and Company 2, respectively, are given by C1 = ¿g{ and C2 = 692, and the market price P is given by P = 90-91-92. Let T1 and T2 denote the profit made by Company 1 and Company 2, respectively. Both companies want to choose their production strategies in order to maximize their respective profits. (a) Find the solution of this problem using the Cournot model. (b) Find the solution of this problem using the Stackelberg model with Company 1 de- ciding its production strategy first. (c) Suppose that Company 1 can afford to sustain a temporary loss, whereas Com- pany 2 cannot. Show that, for some value c, if Company 1 chooses q1 > c then it can force Company 2 out of the market, by making it unprofitable for Company 2 to produce any goods. (d) Suppose that Company 1 has forced Company 2 out of the market and now forms à monopoly. Determine its new production strategy and profit.

1. Two companies produce similar items for the same market. Company 1 produces q1 items and Company 2 produces 42 items. The costs, C, and C2, incurred by Company 1 and Company 2, respectively, are given by C1 = ¿g{ and C2 = 692, and the market price P is given by P = 90-91-92. Let T1 and T2 denote the profit made by Company 1 and Company 2, respectively. Both companies want to choose their production strategies in order to maximize their respective profits. (a) Find the solution of this problem using the Cournot model. (b) Find the solution of this problem using the Stackelberg model with Company 1 de- ciding its production strategy first. (c) Suppose that Company 1 can afford to sustain a temporary loss, whereas Com- pany 2 cannot. Show that, for some value c, if Company 1 chooses q1 > c then it can force Company 2 out of the market, by making it unprofitable for Company 2 to produce any goods. (d) Suppose that Company 1 has forced Company 2 out of the market and now forms à monopoly. Determine its new production strategy and profit.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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