C2) Company A is the only supplier of glass in Big Apple City used for tall buildings’ exteriors. Its marginal cost of production is cA=1, and it has no other production costs. The demand for such glass in Big Apple city is QD=2-P. Company B in Jersey City produces the same glass and is considering whether to expand to Big Apple city. If it enters, it needs to get a permit to allow it to be a supplier in the Big-Apple city at a cost of L=0.5, which does not vary with quantity of output, and its marginal cost of production is cB=0.5. If it expands to the Big-Apple city, companies A and B both supply to the market, and the market price P satisfies QA+QB=2-P, where QA is company A’s production level and QB is company B’s. a) If company B expands to the Big-Apple city, what is the resulting price in a Nash equilibrium?
C2) Company A is the only supplier of glass in Big Apple City used for tall buildings’ exteriors. Its marginal cost of production is cA=1, and it has no other production costs. The demand for such glass in Big Apple city is QD=2-P. Company B in Jersey City produces the same glass and is considering whether to expand to Big Apple city. If it enters, it needs to get a permit to allow it to be a supplier in the Big-Apple city at a cost of L=0.5, which does not vary with quantity of output, and its marginal cost of production is cB=0.5. If it expands to the Big-Apple city, companies A and B both supply to the market, and the market price P satisfies QA+QB=2-P, where QA is company A’s production level and QB is company B’s.
a) If company B expands to the Big-Apple city, what is the resulting price in a Nash equilibrium?
b) Company B hires a consulting company to advise whether it should expand to the Big-Apple city. If you’re running the consulting company, what is your advice? Explain your advice. What is the largest value of the permit cost L such that you would advise company B to enter the market?
c) Suppose both companies are in the market of Big-Apple city. Company A persuades the mayor of the city to pass an environmental law. Because of its production technology Company B is affected by the law, and to meet the new environmental standards its marginal cost of production increases by 0.7. However, Company A has a technology which meets the requirements of the law, so its marginal cost does not change. As a result, Company B’s business starts to suffer.
d) What are the profits of both firms after the law is passed?
e) After the law in part c) is passed, if company B can use company A’s technology and hence avoid the increase in its marginal cost due to the environmental law, what would be each firm’s profit?
f) After the law in part c) is passed, company B is considering purchasing a license from Company A to use A’s patented production technology. If you are the manager of Company A, how much should you charge for the license?
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