2. Consider 3 identical firms with average costs of 40 that produce a homogeneous good. There is also a potential entrant with average cost equal to 20. Firstly, new firm decides whether to enter or not at a fixed cost of 800, then firms simultaneously compete in quantities. Inverse market demand is P = 100-Q, where P is market price and Q is the market quantity demanded. a) Derive equilibrium output, market price, profit and consumer surplus. Will new firm enter the market? b) Derive equilibrium output, market price, profit and consumer surplus, if two incumbent firms merge. Will new firm enter the market? c) A regulator for this market has objective function W = AII+(1-2)CS, where II is industry profit, which does not include entry costs, CS denotes consumer surplus and 2 is a constant, 0 ≤ ≤ 1. At what level of would the regulator will permit merger? Provide intuition for your result.

2. Consider 3 identical firms with average costs of 40 that produce a homogeneous good. There is also a potential entrant with average cost equal to 20. Firstly, new firm decides whether to enter or not at a fixed cost of 800, then firms simultaneously compete in quantities. Inverse market demand is P = 100-Q, where P is market price and Q is the market quantity demanded. a) Derive equilibrium output, market price, profit and consumer surplus. Will new firm enter the market? b) Derive equilibrium output, market price, profit and consumer surplus, if two incumbent firms merge. Will new firm enter the market? c) A regulator for this market has objective function W = AII+(1-2)CS, where II is industry profit, which does not include entry costs, CS denotes consumer surplus and 2 is a constant, 0 ≤ ≤ 1. At what level of would the regulator will permit merger? Provide intuition for your result.

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter24: Price-searcher Markets With High Entry Barriers

Section: Chapter Questions

Problem 7CQ

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