ECS2731_2017_Tutorial 9_Questions.pdf -...

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ECS2731_2017_S2_Tutorial 9 Questions 1. An incumbent firm, Firm 1, faces a potential entrant Firm 2, that has a lower marginal cost. The market demand curve is ? = 120 − ? 1 − ? 2 . Firm 1 has a constant marginal cost of $20, while Firm 2’s is $10 and they have no fixed costs. a. What are the Cournot equilibrium price, quantities, and profits without government intervention? b. To block entry, the incumbent appeals to the government to require that the entrant incur extra costs. What happens to the Cournot equilibrium price, quantities, and profits; if the legal requirement causes the marginal cost of the second firm to rise to that of the first firm, $20? 2. Suppose that identical duopoly firms have constant marginal costs of $10 per
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