Cost reduction and the Herfindahl and Lerner indexes. Consider an industry where demand has constant price elasticity and firms compete in output levels. In an initial equilibrium, both firms have the same marginal cost, c. Then Firm 1, by investing heavily in R&D, manages to reduce its marginal cost to c′ , c; a new equilibrium takes place. (a) What impact does the innovation have on the values of H and L? (b) What impact does the innovation have on consumer welfare? (c) What do the previous answers have to say about L as performance measure?

Cost reduction and the Herfindahl and Lerner indexes. Consider an industry where demand has constant price elasticity and firms compete in output levels. In an initial equilibrium, both firms have the same marginal cost, c. Then Firm 1, by investing heavily in R&D, manages to reduce its marginal cost to c′ , c; a new equilibrium takes place. (a) What impact does the innovation have on the values of H and L? (b) What impact does the innovation have on consumer welfare? (c) What do the previous answers have to say about L as performance measure?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter15: Imperfect Competition

Section: Chapter Questions

Problem 15.10P: Inverse elasticity rule Use the first-order condition (Equation 15.2 ) for a Cournot firm to show...

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