Question 3: Suppose the inverse demand for a good is given by P = 50 – 4Q, where Q is the total quantity supplied by all firms in the market. Suppose each firm in the market has a constant marginal cost of 18. Q3 a) Assume the market consists of two firms that set their quantities simultaneously. Calculate the duopoly levels of production and the equilibrium price. Q3 b) Now assume firm 1 chooses its production level before firm 2 does. What will be the equilibrium quantities, price and profits in this case? Q3 c) Now instead suppose that the two firms compete over prices rather than quantities. What will be the equilibrium price and profits of firms 1 and 2 in this case? Finally, if firm 1 manages to lower its marginal cost to 14, what will be the new equilibrium price, quantities and profits?
Question 3:
Suppose the inverse demand for a good is given by P = 50 – 4Q, where Q is the total
quantity supplied by all firms in the market. Suppose each firm in the market has a constant
marginal cost of 18.
Q3 a) Assume the market consists of two firms that set their quantities simultaneously.
Calculate the duopoly levels of production and the
Q3 b) Now assume firm 1 chooses its production level before firm 2 does. What will be the
equilibrium quantities, price and profits in this case?
Q3 c) Now instead suppose that the two firms compete over prices rather than quantities.
What will be the equilibrium price and profits of firms 1 and 2 in this case? Finally, if firm 1
manages to lower its marginal cost to 14, what will be the new equilibrium price, quantities
and profits?
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