Intermediate Microeconomics: A Modern Approach, Seventh Edition

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14.04 Midterm Exam 3 Prof. Sergei Izmalkov Wed, Dec 3 1. Consider an industry with 3 fi rms, each having marginal costs equal to 0 . 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 fi rm behaves as a Cournot competitor, what is fi rm 1 ’s best response function optimal choice given other fi rms outputs? (b) Calculate the Cournot equilibrium. (c) Firms 2 and 3 decided to merge and form a single fi rm with marginal costs still equal to 0 . Calculate new industry equilibrium. Is fi rm 1 is worse of or better of as a result? Was it a good idea for fi rms 2 and 3 to merge? Would it be a good idea for all three fi rms to organize the cartel? (d) Suppose fi rm 1 can commit to a certain level of output in advance. If the choice of fi rm 1 is q 1 , what would be the optimal choices of fi rms 2 and 3? (Hint: After observing q 1 fi rms 2 and 3 would engage in (Cournot) duopolistic competition. What is the optimal level of q 1 ? Calculate pro fi ts of fi rm 1 , compare with
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