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Tinytown, Tennessee has 140 residents. There are two firms servicing the town, ATT and Verizon. The "good" being sold is cell phone service with unlimited anytime minutes and a free phone. The inverse demand function for service in the town is given by the following. P=70-0.50 Each firm faces this market demand function. Since the towers are already in place, we can assume neither firm has any significant fixed cost. Both firms have identical cost structures with the cost function for each firm being given by the following. C=100

Tinytown, Tennessee has 140 residents. There are two firms servicing the town, ATT and Verizon. The "good" being sold is cell phone service with unlimited anytime minutes and a free phone. The inverse demand function for service in the town is given by the following. P=70-0.50 Each firm faces this market demand function. Since the towers are already in place, we can assume neither firm has any significant fixed cost. Both firms have identical cost structures with the cost function for each firm being given by the following. C=100

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Tinytown. Tennessee has 140 residents. There are two firms servicing the town, ATT and Verizon. The "good" being sold is cell phone service with unlimited anytime minutes and a free phone. The inverse demand function for service in the town is given by the following. P=70-0.50 Each firm faces this market demand function. Since the towers are already in place, we can assume neither firm has any significant fixed cost. Both firms have identical cost structures with the cost function for each firm being given by the following. C =100 Part a: Suppose the two firms engage in Bertrand competition, what market price will result, how many units will each firm sell, how many units in total will be sold, and how much profit will each earn? Part b: Now suppose the two firms agree to collude and behave as a single monopoly and share the outcome (customers serviced) equally, what market price will result, how many units will each firm sell, how many units in total will be sold, and how much profit will each earn? Part c: Following the collusive agreement in part b, suppose ATT decides to renege on the agreement and produces Q = 40, what happens to the market price? ATT's profits? Is it in ATT's interest to renege on the agreement? Part d: Given your answer in part c, does Verizon have an incentive to renege on agreement? If so and it follows ATT and produces Q = 40, what happens to the market price? How much will each firm earn if both renege? How does this compare to the outcome where both stuck to the agreement? Part e: Given your result in part d, does either firm have an incentive to further increase units sold? Part f: Describe the Nash equilibrium that emerges once the competitors begin reneging on the collusive agreement. Why does this result emerge?
Transcribed Image Text:Tinytown. Tennessee has 140 residents. There are two firms servicing the town, ATT and Verizon. The "good" being sold is cell phone service with unlimited anytime minutes and a free phone. The inverse demand function for service in the town is given by the following. P=70-0.50 Each firm faces this market demand function. Since the towers are already in place, we can assume neither firm has any significant fixed cost. Both firms have identical cost structures with the cost function for each firm being given by the following. C =100 Part a: Suppose the two firms engage in Bertrand competition, what market price will result, how many units will each firm sell, how many units in total will be sold, and how much profit will each earn? Part b: Now suppose the two firms agree to collude and behave as a single monopoly and share the outcome (customers serviced) equally, what market price will result, how many units will each firm sell, how many units in total will be sold, and how much profit will each earn? Part c: Following the collusive agreement in part b, suppose ATT decides to renege on the agreement and produces Q = 40, what happens to the market price? ATT's profits? Is it in ATT's interest to renege on the agreement? Part d: Given your answer in part c, does Verizon have an incentive to renege on agreement? If so and it follows ATT and produces Q = 40, what happens to the market price? How much will each firm earn if both renege? How does this compare to the outcome where both stuck to the agreement? Part e: Given your result in part d, does either firm have an incentive to further increase units sold? Part f: Describe the Nash equilibrium that emerges once the competitors begin reneging on the collusive agreement. Why does this result emerge?
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