Economics 1100: Intermediate Microeconomics Spring 2011 Problem Set 7 1. Suppose two firms 1 and 2 compete in quantities and face a demand curve p = 100 – q. Suppose firm 1 has a constant marginal cost of 10 while firm 2 has a constant marginal cost of 40. Suppose they produce quantities simultaneously. a. Find quantity produced by each firm in a Cournot equilibrium. b. Find the market price and the consumer surplus. Suppose the firms merge, and form a single new firm that will operate at a constant marginal cost of 10. c. Find the price charged by this new, single firm. d. Find the consumer surplus at this new price. Is it higher or lower than above? 2. Consider the same two firms as above with marginal costs 10 and 40, facing a demand p = 100 – q . a. Find the market price and quantities produced if firm 1 moved first, followed by firm 2 b. Find the market price and quantities produced if firm 2 moves first, followed by firm 1. c.
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