Question

Two organic emu ranchers, Bill and Ted, serve a small metropolitan market. Bill and Ted are Cournot competitors, making a conscious decision each year regarding how many emus to breed. The price they can charge depends on how many emus they collectively raise, and demand in this market is given by Q = 150 − P. Bill raises emus at a constant marginal and average total cost of $10; Ted raises emus at a constant marginal and average total cost of $20. (a) Find the Cournot equilibrium price, quantity (total and for each rancher), profits (for both ranchers), and consumer surplus. (b) Suppose that Ted breeds his emus earlier in the year than Bill, and is a first-mover in the market. Find the Stackelberg equilibrium price, quantity (total and for each rancher), and profits (for both ranchers). Does your answer coincide with the first-mover advantage? (c) Suppose that Bill and Ted merge, and become a monopoly provider of emus. Further, suppose that Ted adopts Bill’s production techniques. Find the monopoly price, quantity, total profits, and consumer surplus. (d) Has the combination of the two ranches discussed above been good for society or bad for society? Discuss how the forces of monopoly power and increased efficiency tend to push social well-being in opposite directions.

Answer 1