3) Two firms produce a homogeneous product. Inverse demand is P(Q) = D− Q. Firm 1 has a constant marginal cost of c₁ and firm 2 has a constant marginal cost of c₂. Assume that D> C₂ > C₁ > 0. a) Solve for the competitive equilibrium price and output level for each firm. b) Solve for the Cournot equilibrium price and output level for each firm. c) What is the total deadweight loss arising from Cournot competition in this market? d) Productive inefficiency refers to the extra costs to produce a given amount relative to the lowest cost method of producing that amount. How much of this loss is due to productive inefficiency rather than market power?

3) Two firms produce a homogeneous product. Inverse demand is P(Q) = D− Q. Firm 1 has a constant marginal cost of c₁ and firm 2 has a constant marginal cost of c₂. Assume that D> C₂ > C₁ > 0. a) Solve for the competitive equilibrium price and output level for each firm. b) Solve for the Cournot equilibrium price and output level for each firm. c) What is the total deadweight loss arising from Cournot competition in this market? d) Productive inefficiency refers to the extra costs to produce a given amount relative to the lowest cost method of producing that amount. How much of this loss is due to productive inefficiency rather than market power?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Consider an industry with 2 firms engaging in quantity competition and facing the market demand function as Q = 200 – 4P. Suppose each firm bears the same cost production as C(q) = 100 + 0.25q? when producing q units. a. Derive Firm 1's best response function, q1(q2), against Firm 2's output level choice, q2. b. Find the equilibrium output level of Firm 1 at the N.E. equilibrium. c. Find the deadweight loss caused by the duopoly. d. Find again the equilibrium output level of Firm 1 if it acts as the leader while Firm 2 as the follower.
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