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Unformatted text preview: Department of Economics Fall 2007 University of California, Berkeley Prof. Gilbert Problem Set 2 Due in class on Tuesday, October 16 th 1. Let the inverse demand for gabions be given by P ( Q ) = 200- 5 Q . Suppose that five gabion suppliers exist and that further entry into the market is infeasible. The cost structure of each supplier is given by C ( q i ) = 50 q i , where i q i = Q . (a) Assume the five firms are price-takers. Graph the supply and demand curves. Find the prices, quantities, and profits that arise in the competitive equilibrium. (b) Suppose that the firms form a perfect cartel, i.e. one that sets the monopoly price, and agree to split production evenly between firms. Find the new market price and quantity, and the firm-specific quantities and profits. (c) Let four firms set prices at the cartel level. What is the maximal profit that the remaining firm could earn by cheating on the cartel, given that market quantity is determined by the demand schedule? What is the corresponding market price anddetermined by the demand schedule?...
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- Fall '07