Suppose the inverse market demand for manufactures is P(Q) = A – Q, where P and Q denote price and total goods produced and the parameter A denotes the size of the domestic market. Suppose any firm has a cost function, c(q) = cq, where A > c. Suppose there are two firm in the market which produce q1 and q2, where Q = q1 + q2. a. Solve for the Cournot equilibrium levels of output (Q*), price (P*) and markups. b. What is the impact of an increase in market size, A, on Q*, P* and markups when there are two firms? Provide some intuition for these predictions. c. Suppose a third firm enters so that Q = q1 + q2 + q3. What is the impact of entry on Q*, P* and markups? And why? Explanation and math work for all three parts please!!
Suppose the inverse market demand for manufactures is P(Q) = A – Q, where P and Q denote price and total goods produced and the parameter A denotes the size of the domestic market. Suppose any firm has a cost function, c(q) = cq, where A > c. Suppose there are two firm in the market which produce q1 and q2, where Q = q1 + q2. a. Solve for the Cournot equilibrium levels of output (Q*), price (P*) and markups. b. What is the impact of an increase in market size, A, on Q*, P* and markups when there are two firms? Provide some intuition for these predictions. c. Suppose a third firm enters so that Q = q1 + q2 + q3. What is the impact of entry on Q*, P* and markups? And why? Explanation and math work for all three parts please!!
Chapter15: Imperfect Competition
Section: Chapter Questions
Problem 15.1P
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Question
Suppose the inverse market demand for manufactures is P(Q) = A – Q, where P and Q denote
price and total goods produced and the parameter A denotes the size of the domestic market.
Suppose any firm has a cost function, c(q) = cq, where A > c. Suppose there are two firm in the
market which produce q1 and q2, where Q = q1 + q2.
a. Solve for the Cournot equilibrium levels of output (Q*), price (P*) and markups.
b. What is the impact of an increase in market size, A, on Q*, P* and markups when there are two
firms? Provide some intuition for these predictions.
c. Suppose a third firm enters so that Q = q1 + q2 + q3. What is the impact of entry on Q*, P* and
markups? And why?
Suppose any firm has a cost function, c(q) = cq, where A > c. Suppose there are two firm in the
market which produce q1 and q2, where Q = q1 + q2.
a. Solve for the Cournot equilibrium levels of output (Q*), price (P*) and markups.
b. What is the impact of an increase in market size, A, on Q*, P* and markups when there are two
firms? Provide some intuition for these predictions.
c. Suppose a third firm enters so that Q = q1 + q2 + q3. What is the impact of entry on Q*, P* and
markups? And why?
Explanation and math work for all three parts please!!
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