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325Problemset3-Fall05

# 325Problemset3-Fall05 - plus higher in industry A or B 3...

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ECON 325, IO (Fall 2005) Christoph L¨ulfesmann, SFU Homework Assignment #3 This assignment is due on Wednesday, Nov 2 in class. 1.) Please solve Problem 1, p.224 [Problem 1, p. 277 in 2nd ed.] Explain carefully. 2.) There are two industries A and B , and each industry is a duopoly. The firms in industry A are identical. They face an inverse demand , P A = 1 - Q A , and each firm has constant unit costs c < 1. The firms in industry B face a similar inverse demand, P B = 1 - Q B . However, they are not identical. Firm 1 has unit costs c - d , whereas firm 2 has a higher unit cost c + d , where d < c < 1. The firms in each industry play a Cournot game. a) Solve for the Cournot outcome in each industry (quantities, profits, prices). b) Is social welfare (measured by the sum of producer and consumer sur-
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Unformatted text preview: plus) higher in industry A or B ? 3.) Untel and Cyrox are two ﬁrms who produce computer chips. Market demand is given by P = 120-20 Q , where Q is total quantity. Both ﬁrms have constant marginal costs. However, Untel can produce more cheaply than Cyrox. Marginal cost at Untel is 20, while at Cyrox it is 40. a) Derive the Cournot equilibrium formally. Graph the equilibrium and explain. b) The ﬁrms secretly agree to form a cartel. They jointly determine their output levels, and share total proﬁts equally. How much will each ﬁrm produce? What will be the proﬁt earned by each (as part of their cartel agreement, they can make payments to each other)? Explain! 1...
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