Exercise 6.6. Consider a duopoly in which companies compete according to Cournot's model. The inverse market demand curve is: P(Q)=100-Q , where Q=Q1+Q2 and the average and marginal costs of firms are constant and equal to 40 Calculate profits would each company make? How much would company 1 be willing to invest to reduce its CM from 40 to 25, assuming company 2 does not support it? Graphically show and comment on all results

Exercise 6.6. Consider a duopoly in which companies compete according to Cournot's model. The inverse market demand curve is: P(Q)=100-Q , where Q=Q1+Q2 and the average and marginal costs of firms are constant and equal to 40 Calculate profits would each company make? How much would company 1 be willing to invest to reduce its CM from 40 to 25, assuming company 2 does not support it? Graphically show and comment on all results

Microeconomics: Principles & Policy

14th Edition

ISBN:9781337794992

Author:William J. Baumol, Alan S. Blinder, John L. Solow

Publisher:William J. Baumol, Alan S. Blinder, John L. Solow

Chapter13: Between Competition And Monopoly

Section: Chapter Questions

Problem 5DQ

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Consider a Cournot Duopoly model. The inverse demand for their products is given byP = 200 − 6Q, where Q is the total quantity supplied in the market (that is, Q = Q1 + Q2). Each firm has an identical cost function, given by TCi = 2Qi, for i = 1, 2.(a) In the Cournot model, what does each firm choose?(b) What is the timing of each firm’s decision?
1. Consider an industry with inverse demand given by p = 8 – q, where p is the price, and q is the quantity. There is one incumbent firm and one potential entrant. In the first stage of the game, the incumbent chooses its quantity qi. In the second stage, the potential entrant observes qi and chooses its quantity Ce. The potential entrant can also decide not to enter the market. The production technology of both firms are represented by the cost function C = 2q. To enter industry implies a fixed entry cost of F. (a) Find the equilibrium of the game, assuming that the potential entrant enters the industry. What are the profits of firms? (b) Assume that entry is not blockaded. For which values of F does the incumbent firm prefer to deter entry? (c) For which values of F, entry blockaded?
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