Study Guide for Microeconomics
9th Edition
ISBN: 9780134741123
Author: Robert Pindyck, Daniel Rubinfeld
Publisher: PEARSON
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Question
Chapter 12, Problem 7E
(a)
To determine
MC of firm A increases to $80.
(b)
To determine
MC of both firm increases.
(c)
To determine
Demand curve shifts towards the right.
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Consider a market for crude oil production. There are two firms in the market. The marginal cost of firm 1 is 20, while that of firm 2 is 20. The marginal cost is assumed to be constant. The inverse demand for crude oil is P(Q)=200-Q, where Q is the total production in the market. These two firms are engaging in Cournot competition. Find the production quantity of firm 1 in Nash equilibrium. If necessary, round off two decimal places and answer up to one decimal place.
Two firms compete by choosing price. Their demand functions are: Q1 = 20 -P1 +P2 and Q2 = 20 - P1 + P2 where P1 and P2 are the prices charged by each firm, respectively, and Q1 and Q2 are the resulting demands. Note that the demand for each good depends only on the difference in prices; if the two firms colluded and set the same price, they could make that price as high as they wanted and earn infinite profits. Marginal costs are zero.a. Suppose the two firms set their prices at the same time. Find the resulting Nash equilibrium. What price will each firm charge, how much will it sell, and what will its profit be? (Hint: Maximize the profit of each firm with respect to its price.) {15 Marks}b. Suppose Firm 1 sets its price first and then Firm 2 sets its price. What price will each firm charge, how much will it sell, and what will its profit be? {10 Marks}c. Suppose you are one of these firms and that there are three ways you could play the game: (i) Both firms set price at the same…
suppose there are two firms that compete in prices, say firms 1 and 2, but that the firms produce differentiated products. Suppose that the demand for firm 1 is q1(p1,p2)=10-2p1+p2 and the demand for firm 2 is q2(p2,p1)=10-2p2+p1. Also, assume that firm 1 has a constant marginal cost of c1 = 2 and firm 2 has a constant marginal cost of c2 = 3.
i. Solve for the Bertrand equilibrium in prices.
ii. Now, suppose firms 1 and 2 merge and firm 1 will operate both firms and they will split the resulting profits equally. Will both firms agree to this merger or do they prefer the Bertrand outcome?
Chapter 12 Solutions
Study Guide for Microeconomics
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