Ch12 - Monopolistic Competition and Oligopoly

Set this expression equal to 0 to determine the

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Set this expression equal to 0 to determine the profit-maximizing quantity: 53 - 2 Q 1  - 24 +  Q 1  - 5 = 0, or  Q 1  = 24. Substituting  Q 1  = 24 into Firm 2’s reaction function gives  Q 2 : Q 2 24 24 2 12 = - = . Substitute  Q 1  and  Q 2  into the demand equation to find the price: P  = 53 - 24 - 12 = $17. Profits for each firm are equal to total revenue minus total costs, or π 1  = (17)(24) - (5)(24) = $288  and        π 2  = (17)(12) - (5)(12) = $144. Total industry profit,  π T  =  π 1  +  π 2  = $288 + $144 = $432. Compared to the Cournot equilibrium, total output has increased from 32 to 36, price  has fallen from $21 to $17, and total profits have fallen from $512 to $432.  Profits for  200
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Chapter  12:  Monopolistic Competition and Oligopoly Firm 1 have risen from $256 to $288, while the profits of Firm 2 have declined  sharply from $256 to $144. b. How much will each firm produce, and what will its profit be? If   each   firm believes that it is the Stackelberg leader, while the other firm is the  Cournot follower, they both will initially produce 24 units, so total output will be 48  units.  The market price will be driven to $5, equal to marginal cost.  It is impossible  to specify exactly where the new equilibrium point will be, because no point is stable  when both firms are trying to be the Stackelberg leader. 5.   Two firms compete in selling identical widgets.   They choose their output levels   Q and  Q 2  simultaneously and face the demand curve P  = 30 -  Q, where   Q   =   Q 1   +   Q 2 .     Until   recently,   both   firms   had   zero   marginal   costs .     Recent  environmental   regulations   have   increased   Firm   2’s   marginal   cost   to   $15.     Firm   1’s  marginal cost remains constant at zero.  True or false: As a result, the market price will  rise to the  monopoly  level. True. If only one firm were in this market, it would charge a price of $15 a unit.  Marginal revenue  for this monopolist would be  MR = 30 - 2Q, Profit maximization implies MR = MC,   or 30 - 2Q = 0,   Q = 15,   (using the demand curve) P = 15. The current situation is a Cournot game where Firm 1's marginal costs are zero and Firm  2's marginal costs are 15.   We need to find the best response functions: Firm 1’s revenue is and its marginal revenue is given by: Profit maximization implies MR 1  = MC 1  or which is Firm 1’s best response function.
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