Pearson eText Microeconomics -- Access Card
2nd Edition
ISBN: 9780136849513
Author: Acemoglu, Daron, Laibson, David, List, John
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 14, Problem 7Q
(a)
To determine
Residual demand curve of both the firms.
(b)
To determine
Nash equilibrium price strategy
(c)
To determine
Nash equilibrium when the firm decides to collude.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Consider a noncollusive duopoly model with both firms
supplying bottled drinking water. The marginal cost for
each firm is $1.50. The market demand is shown by the
figure on the right.
Let us assume that the two firms supplying bottled drinking
water are Firm A and Firm B. The price charged by Firm A
is denoted as PA and the price charged by Firm B is
denoted as PB-
Find the demand functions for each of the firms.
If PA S$5, then demand for Firm A's bottled drinking
water is:
thousand if PA PB
thousand if PA = PB
thousand if PA > PB
If PB ≤ $5, then demand for Firm B's bottled drinking
water is:
thousand if PB PA
Price
10-
9-
8-
7-
6-
5-
4-
3-
2-
1-
0-
0
0.5
1
Demand
2 2.5 3 3.5
1.5
Quantity (in thousands)
4
4.5
Three firms compete in the style of Cournot. The inverse demand is P(Q) = a - Q. Scenario 1: All three firms have the same constant marginal cost MC = c. Scenario 2:
Firm 1 has MC = 0.5c, Firm 2 has MC = c, and Firm 3 has MC = 1.5c. Assume that a > 3c. Which of the following is correct? (Price means the price in Nash equilibrium.)
Price in scenario 1 > Price in scenario 2
Price in scenario 2 > Price in scenario 1
Price in scenario 1 = Price in scenario 2
Any of the first three options is possible depending on the value of a
Any of the first three options is possible depending on the value of a and c.
Consider a Cournot duopoly with the inverse demand P = 200 − 2Q. Firm 1 and 2 compete by simultaneously choosing their quantities. Both firms have constant marginal and average cost MC = AC = 20.
A) Find each firm’s best response function. Plot the best response functions (label the x-axes as ?1 and y-axes as ?2 ).
B) Find the Cournot-Nash equilibrium quantities, profits and market price. Illustrate the equilibrium point on your graph in part (A).
C) Suppose instead that firm 1 had MC = AC = 20, but firm 2’s MC = 8. What is the Cournot-Nash equilibrium outputs and profits now? How would this affect your answers to part (B)? Explain
Chapter 14 Solutions
Pearson eText Microeconomics -- Access Card
Knowledge Booster
Similar questions
- 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.arrow_forwardWhat is the duopoly Nash-Cournot equilibrium if the market demand function is Q = 500 - 10p and each firm’s marginal cost is 5¢ per unit?arrow_forward1.6. Consider the Cournot duopoly model where inverse demand is P(Q) = a - Q but firms have asymmetric marginal costs: c₁ for firm 1 and c2 for firm 2. What is the Nash equilibrium if 0 a+c₁?arrow_forward
- Consider a Cournot duopoly with a demand function of p=10-Q (where Q=9₁ +9₂) and a constant marginal cost of c>0. Find the two firms' best-response functions. Find the Nash equilibrium output. What happens to the equilibrium market price as c increases (assuming that c remains below 10)? What happens to the equilibrium market price if c increases above 10?arrow_forwardConsider a duopoly where firms compete in prices and firms do not have any capacity constraints. Market demand is P(Q)=45-4Q, and each firm faces a marginal cost of $9 per unit. How much is each firm's total variable cost if firms equally divide the market at Nash equilibrium?arrow_forwardConsider a Cournot duopoly with the inverse demand P = 200−2Q. Firm 1 and 2 compete by simultaneously choosing their quantities. Both firms have constant marginal and average cost MC = AC = 20. A) Find each firm’s best response function. Plot the best response functions (label the x-axes as ?1 and y-axes as ?2 ). B) Find the Cournot-Nash equilibrium quantities, profits and market price. Illustrate the equilibrium point on your graph in part Aarrow_forward
- Duopoly and menu costs. (This is adapted from CaminaI 1987.) Consider two firms producing imperfect substitutes. Both firms can produce at zero marginal cost. The demand for the good produced by firm i is given by Now suppose that both firms enter the period with price p., which is the Nash equilibrium price for some value of a, a·. They know b and c. They each observe the value of a for the period, and each firm must independently quote a price for the period. If it wants to quote a price different from p*, it must pay a cost k. Otherwise, it pays nothing. Once prices are quoted, demand is allocated, demand determines produdion, and profits are realized. (b) Compute the set of values of a (around a*) for which not to adjust prices is a Nash equilibrium. (c) Compute the set of values of a (around a*) for which to adjust prices is a Nash equilibrium. (d) Check that all equilibria are symmetric and therefore that there are no other equilibria than the ones computed above.…arrow_forwardA homogenous-good duopoly faces an inverse market demand function of p = 150 − Q. Assume that both firms face the same constant marginal cost, MC1 = MC2 = 30. Calculate the output of each firm, the market output, and the market price in a Nash-Cournot equilibrium Re-solve part (a) assuming that the marginal cost of firm 1 falls to MC1 =20 Explain what will happen to each firm’s output, the market output, and the market price if the two firms can collude (e.g., form a cartel)arrow_forwardConsider a duopolistic market with two firms, A and B, facing a market demand curve of P=100-qA –qB for the same product. Assume that the cost of production is CA=2qA for firm A and CB=4qB for firm B. Suppose that both firms make output decision simultaneously. In Nash equilibrium, the firm A should produce unit, and its profit is In Nash equilibrium, the firm B should produce unit, and its profit is .arrow_forward
- Joe and Rebecca are small-town ready-mix concrete duopolists. The market demand function is Qd = 10,000 – 100P, where P is the price of a cubic yard of concrete and Qd is the number of cubic yards demanded per year. Marginal cost is $25 per cubic yard. Suppose that Joe and Rebecca compete in quantities and competition in this market is described by Cournot model. What are Joe and Rebecca’s Nash equilibrium outputs? What is the resulting price? What do they each earn as profit? How does the price compare to the marginal cost? Joe and Rebecca are small-town ready-mix concrete duopolists. The market demand function is Qd = 10,000 – 100P, where P is the price of a cubic yard of concrete and Qd is the number of cubic yards demanded per year. Marginal cost is $25 per cubic yard. Suppose that Joe and Rebecca compete in quantities and competition in this market is described by Cournot model. What are Joe and Rebecca’s Nash equilibrium outputs? What is the resulting price? What do they each…arrow_forwardConsider a Cournot duopoly with a demand function of p=10-Q(where Q=q1+q2) and a constant marginal cost of c>0. a) Find the two firms’ best-response functions. b) Find the Nash equilibrium output. c) What happens to the equilibrium market price as c increases (assuming that c remains below 10)? d) What happens to the equilibrium market price if c increases above 10?arrow_forwardThe firms in a duopoly produce differentiated products. The inverse demand for Firm 1 is The inverse demand for Firm 2 is and P₁ = 52-9₁-0.592. Each firm has a marginal cost of m= $1 per unit. Solve for the Nash-Cournot equilibrium quantities. The Cournot equilibrium quantities are (Enter your responses rounded to two decimal places.) P₂ = 100-92-0.5q1₁. 91 = units 92 units. =arrow_forward
arrow_back_ios
arrow_forward_ios
Recommended textbooks for you
Exploring EconomicsEconomicsISBN:9781544336329Author:Robert L. SextonPublisher:SAGE Publications, Inc
Exploring Economics
Economics
ISBN:9781544336329
Author:Robert L. Sexton
Publisher:SAGE Publications, Inc