Calculate the equilibrium price and quantity under two firm

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Suppose two firms engage in Cournot (quantity) com- petition in a market described by the following demand curve: Q(p) = 40 − 2p. (1) Assume that the firms each have marginal costs equal to zero. Let q1 and q2 be the quantities produced by each firm and let the aggregate quantity be Q = q1 + q2. (a) As a benchmark, calculate the equilibrium price and quantity in this market under perfect competition. Calculate the equilibrium price and quantity if there was only a monopolist in this market (who was unable to price discriminate). Are these equilibria efficient? Explain why or why not. (b) Graph the market. Calculate the equilibrium price and quantity under two firm, Cournot-style competition. Calculate each firms profits. Illus- trate the equilibrium on your graph along with the relevant welfare measures (producer surplus, consumer surplus, etc.). Is the market operating efficiently? Give an intuitive explanation of why or why not. (c) Suppose that this is a dynamic game: in the first period, firm 1 acts like a monopolist. In the second period, firm 2 enters the market. Suppose that, in the first period, firm 1 chooses the monopoly equilibrium you calculated in part 1a. Further, assume that firm 1 is unable to adjust its quantity in the second period. 1 If firm 1 cannot adjust her quantity, how much will firm 2 produce? Calculate each firms profits, price, and quantity sold in each period. 2 Does firm 2 fare better or worse in this dynamic game relative to the standard Cournot game in part 1b? Suppose that the scenario is the same as than in part 1c, except that firm 1 knows that firm two may enter the market in the second period. Further,. suppose there is a fixed cost of 2 that the entrant must incur should she enter the market in period 2. Calculate the best (profit-maximizing) strategy for firm

Reference no: EM131009701

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