Question 1
Demand in a market is given by the following demand function:

p = 90 - Q;

where Q is total output produced in that industry. Suppose that firms produce at zero marginal cost, but have a fixed cost f = 4: Firms engage in Cournot competition, choosing output simultaneously.

(a) How many firms will enter this market? What will the price be? How much will each produce?

Suppose firms now find that they can also sell the good to three more neighboring towns, which are identical to this one. There are no costs of transportation between the towns, so each firm decides how much to produce in total and price is equated between the four towns.

(b) How many firms will enter this market? What will the price be? How much will each produce?


Question 2

11. A market has N + 1 Cournot competitors. Aggregate demand in the market is given by:

P = 100 – Q

Firm one has zero marginal cost and all the other firms have marginal cost c > 0:

(a) Suppose c = 10 and N = 8: Find the Cournot equilibrium. Give q1..q8 as well as Q and P

(b) Suppose c = 10 and N = 3: Find the Cournot equilibrium. Give q1..q3 as well as Q and P

(c) Suppose there are N = 8 high cost firms. Firm one is considering buying out 5 of these firms by simultaneously making a take-it-or-leave-it offer to all 5 of them (e.g. it announces a deal setting a price q it will pay for each firm that accepts the buyout agreement up to a maximum of 5 firms. If all accept, the deal is made; if any rejects, no acquisition takes place.) What price q should it offer? It is worthwhile to make this offer if in addition it must pay $100 of lawyer fees?

Question 3

Suppose market demand elasticity is equal to one and the market shares of Cournot competitors in this market are: 20%, 30% and 50%. If the market equilibrium price is 100, what are the marginal costs of each of the firms?


Question 4

There are three firms in a market with the following (constant) marginal costs:

c1 = 20; and c2 = c3 = 30 

Demand in the market is given by
p = 100 - Q; 

(a) Compute the Cournot equilibrium. Calculate the profits of each firm. (Note: this case is not symmetric.)

Suppose firms 1 and 2 are considering merging. If they did so, they can choose to produce all output at the lowest marginal cost.

(b) Assume both firms have zero fixed costs. Would it be in their interest to merge (i.e. would profits of the merged firms be higher than the sum of profits prior to merger? Would it be in the interest of consumers? Would total surplus (consumer surplus + producer surplus) increase?

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Status NEW Posted 06 Sep 2017 11:09 AM My Price 8.00

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