TEST BANK CHAPTER 12 SIXTH EDITION MONOPOLISTIC COMPETITION AND OLIGOPOLY 68.Two large diversified consumer products firms are about to enter the market for a new pain reliever. The two firms are very similar in terms of their costs, strategic approach, and market outlook. Moreover, the firms have very similar individual demand curves so that each firm expects to sell one-half of the total market output at any given price. The market demand curve for the pain reliever is given as:Q = 2600 - 400P.Both firms have constant long-run average costs of $2.00 per bottle. Patent protection insures that the two firms will operate as a duopoly for the foreseeable future. Price and quantities are per bottle. If the firms act as Cournot duopolists, solve for the firm and market outputs and equilibrium prices.
CHAPTER 12 TEST BANK MONOPOLISTIC COMPETITION AND OLIGOPOLY SIXTH EDITION Denote the two firms A and B and solve for reaction functions. TR A = P A · Q A TR A = (6.5 - 0.0025Q)Q A TR A = 6.5Q A - 0.0025[(Q A + Q B )Q A ] TR A = 6.5Q A - 0.0025Q A 2 - 0.0025Q A Q B MR A = 6.5 - 0.005Q A - 0.0025Q B Set MR A = MC 6.5 - 0.005Q A - 0.0025Q B = 2 - 0.005Q A = 4.5 + 0.0025Q B Q A = 900 - 0.5Q B One can verify that: Q B = 900 - 0.5Q A Substitute expression for Q B into Q A Q A = 900 - 0.5(900 - 0.5Q A ) Q A = 900 - 450 + 0.25Q A Q A - 0.25Q A = 450 Q A (1 - 0.25) = 450 Q A = = 450 0 75 600 . Substitute expression for Q A into Q B Q B = 900 - 0.5(900 - 0.5Q B ) Q B = 900 - 450 + 0.25Q B Q B - 0.25Q B = 450 Q B (1 - 0.25) = 450 Q 450 0.75 600 B = = Q T = Q A + Q B Q T = 600 + 600 = 1200 P = 6.5 - 0.0025(1200) P = $3.5 per bottle 191
TEST BANK CHAPTER 12 SIXTH EDITION MONOPOLISTIC COMPETITION AND OLIGOPOLY Section 12.3 difficult
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