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?
Two firms produce a homogeneous product. Inverse
a) Solve for the competitive
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b) Solve for the Cournot equilibrium price and output level for each firm.
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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?
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part a)
you say that firm 1 will set price to c1.
it could also set orice to slightly below c2 and still undercut firm 2.
so q2=0, but p=c2, q1=D-c2 would be equilibrium in which firm 1 would actually make profit.
Isn't this better outcome for firm 1?
by Bartleby Expertpart d is not answered
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?
by Bartleby Expert
