Unformatted text preview: 14.04 Midterm Exam 3 Prof. Sergei Izmalkov Wed, Dec 3 1. Consider an industry with 3 f rms, each having marginal costs equal to . The inverse demand curve facing this industry is P ( Q ) = 60 Q, where Q = q 1 + q 2 + q 3 is total output. (a) If each f rm behaves as a Cournot competitor, what is f rm 1 s best response function optimal choice given other f rms outputs? (b) Calculate the Cournot equilibrium. (c) Firms 2 and 3 decided to merge and form a single f rm with marginal costs still equal to . Calculate new industry equilibrium. Is f rm 1 is worse of or better of as a result? Was it a good idea for f rms 2 and 3 to merge? Would it be a good idea for all three f rms to organize the cartel? (d) Suppose f rm 1 can commit to a certain level of output in advance. If the choice of f rm 1 is q 1 , what would be the optimal choices of f rms 2 and 3? (Hint: After observing q 1 f rms 2 and 3 would engage in (Cournot) duopolistic competition. What is the optimal level of q 1 ? Calculate...
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- Fall '06