Question

Two teenagers in my neighborhood, Grant and Steve, are the only ones offering to mow people’s lawns, so they are a duopoly.

(a) Initially, they are competing as Cournot oligopolists – making simultaneous decisions of how many lawns to mow. The market inverse demand is P = 150 − Q. Grant’s constant marginal and average cost is $10 per lawn because he has a new mower. Steve’s marginal and average cost is $20 per lawn because his mower is old and constantly jams and stalls, and mowing takes him much longer and requires more effort. What are Grant and Steve’s profit-maximizing quantities of lawns and the market price? How much profit does each earn?

(b) Suppose Grant wants to acquire Steve’s business and become a monopoly in the neighborhood. If that happens, the new firm will serve the entire market and use Grant’s mower (so the firm will have his MC = $10). How much would Grant be willing to offer Steve to buy him out? (Hint: how much extra profit can the monopoly earn above what the oligopolist earned?)

(c) Would our neighborhood gain or lose if the acquisition described in part (b) happened? Discuss taking into account improved efficiency (lower cost of operation) vs. less competition (monopoly vs. duopoly).

Answer 1

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