Microeconomics (9th Edition) (Pearson Series in Economics)
9th Edition
ISBN: 9780134184890
Author: PINDYCK
Publisher: PEARSON
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Question
Chapter 12, Problem 2E
(a)
To determine
The joint profit maximizing level of output, each firm output, when there is no second firm.
(b)
To determine
Each firm's equilibrium output when they behaves non-cooperatively.
(c)
To determine
Firm 1's willingness to pay to purchase firm 2 when collusion is illegal.
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Suppose an industry consists of two firms that compete in prices. Each firm produces
one product. The demand for each product is as follows:
q1 = 25 - 5p1 + 2p2
q2 = 25 - 5p2 + 2p1
The cost functions are C(qi) = 2 + qi for i = 1; 2.
(a) Are the products produced by these firms homogenous or differentiated?
(b) Find the best response function for each rm.
(c) How does the price firm 1 sets change with its belief about the price of its competitor\'s product?
(d) What are the Nash equilibrium prices?
(e) What is the percentage markup of price over marginal cost here (this is called the Lerner index)? Do the firms have market power? Why does the Bertrand paradox of zero variable duopoly profits apply here?
(f) Suppose the firms merged. What is the new price of products 1 and 2?
(g) Explain intuitively why the price is higher under monopoly than under Bertrand duopoly?
(h) Are total monopoly profits higher or lower than the sum of Bertrand duopoly…
Evaluate the following: “Since a rival’s profit-maximizing price and output depend on its marginal cost and not its fixed costs, a firm cannot profitably lessen competition by implementing a strategy that raises its rival’s fixed costs.”
Two firms sells an identical product. The demand function for each firm is given: Q = 20 - P, where Q = q1 + q2 is the market demand and P is the price. The cost function for reach firm is given: TCi = 10 + 2qi for i = 1, 2. a) If these two firms collude and they want to maximize their combined profit, how much are the market equilibrium quantity and price? b) If these two firms decide their production simultaneously, how much does each firm produce? What is the market equilibrium price? c) If Firm 1 is a leader who decides the production level first and Firm 2 is a follower, how much does each firm produce? What is the market equilibrium price?
Chapter 12 Solutions
Microeconomics (9th Edition) (Pearson Series in Economics)
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