2. Consider 3 identical firms with average costs of 40 that produce a homogeneous good. There is also a potential entrant with average cost equal to 20. Firstly, new firm decides whether to enter or not at a fixed cost of 800, then firms simultaneously compete in quantities. Inverse market demand is P = 100-Q, where P is market price and Q is the market quantity demanded. a) Derive equilibrium output, market price, profit and consumer surplus. Will new firm enter the market? b) Derive equilibrium output, market price, profit and consumer surplus, if two incumbent firms merge. Will new firm enter the market? c) A regulator for this market has objective function W = AII+(1-2)CS, where II is industry profit, which does not include entry costs, CS denotes consumer surplus and 2 is a constant, 0 ≤ ≤ 1. At what level of would the regulator will permit merger? Provide intuition for your result.

2. Consider 3 identical firms with average costs of 40 that produce a homogeneous good. There is also a potential entrant with average cost equal to 20. Firstly, new firm decides whether to enter or not at a fixed cost of 800, then firms simultaneously compete in quantities. Inverse market demand is P = 100-Q, where P is market price and Q is the market quantity demanded. a) Derive equilibrium output, market price, profit and consumer surplus. Will new firm enter the market? b) Derive equilibrium output, market price, profit and consumer surplus, if two incumbent firms merge. Will new firm enter the market? c) A regulator for this market has objective function W = AII+(1-2)CS, where II is industry profit, which does not include entry costs, CS denotes consumer surplus and 2 is a constant, 0 ≤ ≤ 1. At what level of would the regulator will permit merger? Provide intuition for your result.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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