1) A monopoly faces a demand curve P(Q) = 120 – 2Q, and has a marginal cost of 60. a. What is profit-maximizing level of output? What is the profit-maximizing price? How much profit the firm will make? b. Assume that a second firm enters the market. The new firm has an identical cost function. If the two firms enter in a Cournot competition, what will be the price in equilibrium? How much will each firm produce in equilibrium? How much profit will each firm make? c. If, instead, the two firms compete in a Stackelberg game (assume the incumbent firm is the leader), what will be the price in equilibrium? How much each firm will produce in equilibrium? How much profit will each firm make? d. Now assume the follower has to pay a fixed cost, f =100 if q>0. Does it change the follower's decision? Assume again they are playing a Stackelberg game.? e. The leader knows that the follower has to pay the fixed cost and decides produce one third more than the quantity found in part c). Does it change the follower's decision?
1) A monopoly faces a demand curve P(Q) = 120 – 2Q, and has a marginal cost of 60. a. What is profit-maximizing level of output? What is the profit-maximizing price? How much profit the firm will make? b. Assume that a second firm enters the market. The new firm has an identical cost function. If the two firms enter in a Cournot competition, what will be the price in equilibrium? How much will each firm produce in equilibrium? How much profit will each firm make? c. If, instead, the two firms compete in a Stackelberg game (assume the incumbent firm is the leader), what will be the price in equilibrium? How much each firm will produce in equilibrium? How much profit will each firm make? d. Now assume the follower has to pay a fixed cost, f =100 if q>0. Does it change the follower's decision? Assume again they are playing a Stackelberg game.? e. The leader knows that the follower has to pay the fixed cost and decides produce one third more than the quantity found in part c). Does it change the follower's decision?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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part D E
Transcribed Image Text:1) A monopoly faces a demand curve P(Q) = 120 – 2Q, and has a marginal cost of 60.
a. What is profit-maximizing level of output? What is the profit-maximizing price? How
much profit the firm will make?
b. Assume that a second firm enters the market. The new firm has an identical cost
function. If the two firms enter in a Cournot competition, what will be the price in
equilibrium? How much will each firm produce in equilibrium? How much profit will
each firm make?
c. If, instead, the two firms compete in a Stackelberg game (assume the incumbent firm
is the leader), what will be the price in equilibrium? How much each firm will produce
in equilibrium? How much profit will each firm make?
d. Now assume the follower has to pay a fixed cost, f =100 if q>0. Does it change the
follower's decision? Assume again they are playing a Stackelberg game.?
e. The leader knows that the follower has to pay the fixed cost and decides
produce
one third more than the quantity found in part c). Does it change the follower's
decision?
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