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Workshop+Solution

# Workshop+Solution - Workshop solutions Problem 1 Market...

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Workshop solutions Problem 1 Market diagram for parts a) and b) a) As pricetaker each firm produces q= Q/n (where n= 2) and P industry =MC industry the marginal cost of the industry is the horizontal summation of the individual MC curve. Since the individual firm MC curve is horizontal (as MC=1), it follows that the market MC curve must also be horizontal at MC = 1(the horizontal summation of a identical horizontal lines result in the same horizontal line). P = MC =1 Since the Price is determined in the market D MR MC industry P c = 1 Q m * 100 100 P m * Q C The MC in the below represent the industry MC curve. It is the horizontal summation of the 2 firms MC curves. Since each firm has a horizontal MC at a value of 1. The industry MC is the same as the firm’s MC.

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( ) b) As a cartel the firms collectively act as a monopoly Assuming firms share output equally Since the Price is determined in the market Market Price: P = ( ) ( ) c) Using the Cournot model, the firms base their decisions on their reaction functions, R(q).
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