2. Consider a market for a homogenous good with the following inverse demand function: P = 52 – 2Q where Qis total sold quantity on the market. (a) If there is only one firm serving the market and the firm's cost function is C(Q) = 4Q, what quantity will be sold on the market? What will be the market price? What is the firm's profits? Is the market outcome efficient? (b) Suddenly, there is a potential rival firm considering entering the market. It would produce the same good as the incumbent firm and would have an identical variable cost but has a fixed cost of entry, F = 100. The two firms would be faced with a problem of simultaneously deciding on how of the good to sell on the market (the inverse demand function is still the same). Derive both firms' best response functions and draw these in a diagram. Explain the Nash equilibrium in the diagram. (c) Following from (b), what would be the new equilibrium quantity sold in the market and what is the equilibrium market price? Would the potential entrant enter the market?

2. Consider a market for a homogenous good with the following inverse demand function: P = 52 – 2Q where Qis total sold quantity on the market. (a) If there is only one firm serving the market and the firm's cost function is C(Q) = 4Q, what quantity will be sold on the market? What will be the market price? What is the firm's profits? Is the market outcome efficient? (b) Suddenly, there is a potential rival firm considering entering the market. It would produce the same good as the incumbent firm and would have an identical variable cost but has a fixed cost of entry, F = 100. The two firms would be faced with a problem of simultaneously deciding on how of the good to sell on the market (the inverse demand function is still the same). Derive both firms' best response functions and draw these in a diagram. Explain the Nash equilibrium in the diagram. (c) Following from (b), what would be the new equilibrium quantity sold in the market and what is the equilibrium market price? Would the potential entrant enter the market?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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