HW3 - Industrial Organization EC460 Spring 2009 Instructor...

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Industrial Organization: EC460 Spring 2009 Instructor: Thomas D. Jeitschko Assistant: Nakarin Amarase Homework 3 Due: February 25—in class Instructions You must work in groups of at least two and no more than three students on this homework. Hand in one copy of your work per group. Please ask me if you seek clarification on any questions or the logistics of the homework and these instructions. Answer all questions. 1 Cournot Competition vs. Monopoly Consider a market with the following inverse demand: P = 135 - 6 Q 1. Suppose a monopoly with total cost function C = 3 2 Q 2 supplies this market. Find the profit maximizing levels of price and quantity for the monopoly, and then calculate profit and consumer surplus associated with those price and quantity levels. 2. Suppose that there are two entrants, so that there are three identical firms in the market. Show how to derive the Cournot-Nash equlibrium levels of output for each firm. Calculate
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Unformatted text preview: the market price, profit levels for each firm, and consumer surplus at the price and quantity levels. 3. Compare the total surplus generated in the monopoly and oligopoly solutions found in parts 1 and 2. 1 2 Cournot-Nash equilibrium (asymmetric firms) The inverse market demand is given by P = 230-10 Q . There are two firms supplying the market with a homogenous product with unit cost of production equal to AC 1 = MC 1 = 50 and AC 2 = MC 2 = 20, respectively. Assume that they do not have any fixed cost. 1. Suppose they compete in the market in quantities (Cournot competition). Show how to derive the Cournot-Nash equilibrium to this game. What are firms’ profits in equilibrium? What is total welfare? 2. Suppose instead that they compete in prices (Bertrand competition). What is the Bertrand-Nash equilibrium outcome and what are the profits of each firm? Calculate total welfare. 2...
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