3. Suppose two firms are Cournot competitors with TC(q,) = 500 + 100q, (where q, is a given firm's output) and demand curve p= 700-Q, where Q = q1 +92 is total industry output (summing all firm's quantities, as usual). (a) Compute the Cournot equilibrium price, profits for each firm, and the overall consumer surplus. (b) Suppose a third firm enters (with the same cost function). Recalculate the equilibrium. Are total industry profits (summing across all firms) higher in (a) or (b)? What about consumer surplus in (a) vs. (b)? (Hint: should the equilibrium quantities of production be equal across all three firms?) PART II: COURNOT COMPETITORS Consider a quantity-setting oligopoly (Cournot model) where demand is linear and each firm's marginal cost is a constant c, for each firm i. The demand function is P = a – b(qı + 92).
3. Suppose two firms are Cournot competitors with TC(q,) = 500 + 100q, (where q, is a given firm's output) and demand curve p= 700-Q, where Q = q1 +92 is total industry output (summing all firm's quantities, as usual). (a) Compute the Cournot equilibrium price, profits for each firm, and the overall consumer surplus. (b) Suppose a third firm enters (with the same cost function). Recalculate the equilibrium. Are total industry profits (summing across all firms) higher in (a) or (b)? What about consumer surplus in (a) vs. (b)? (Hint: should the equilibrium quantities of production be equal across all three firms?) PART II: COURNOT COMPETITORS Consider a quantity-setting oligopoly (Cournot model) where demand is linear and each firm's marginal cost is a constant c, for each firm i. The demand function is P = a – b(qı + 92).
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:3. Suppose two firms are Cournot competitors with TC(q,) = 500 + 100q, (where q, is a given firm's
output) and demand curve p 700-Q, where Q = qı +42 is total industry output (summing all firm's
quantities, as usual).
(a) Compute the Cournot equilibrium price, profits for each firm, and the overall consumer surplus.
(b) Suppose a third firm enters (with the same cost function). Recalculate the equilibrium. Are total
industry profits (summing across all firms) higher in (a) or (b)? What about consumer surplus
in (a) vs. (b)? (Hint: should the equilibrium quantities of production be equal across all three
firms?)
PART II: COURNOT COMPETITORS
Consider a quantity-setting oligopoly (Cournot model) where demand is linear and each firm's marginal cost
is a constant c, for each firm i. The demand function is P = a – b(q, + 92).
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