Consider a homogeneous good duopoly with linear demand P(Q) = 12-Q, where Q is the total industry output, and constant marginal costs c=3. a. Suppose that firms simultaneously set quantities. Determine the equilibrium price, quantities, profits, and welfare. b. The firms consider merging although their production costs are not affected. Determine the solution to this problem. Is such a merger profitable? What are the welfare effects of this merger? c. Consider the possibility of firm entry after the merger (the entrant produces at marginal costs c=3 and has entry cost F). Suppose first that the merger is not efficiency-enhancing. Analyze such a market and comment on your result (depending on the entry cost F).
4. Consider a homogeneous good duopoly with linear demand P(Q) = 12-Q, where Q is the total industry output, and constant marginal costs c=3.
a. Suppose that firms simultaneously set quantities. Determine the
b. The firms consider merging although their production costs are not affected. Determine the solution to this problem. Is such a merger profitable? What are the welfare effects of this merger?
c. Consider the possibility of firm entry after the merger (the entrant produces at marginal costs c=3 and has entry cost F). Suppose first that the merger is not efficiency-enhancing. Analyze such a market and comment on your result (depending on the entry cost F).
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