The inverse market demand for clothing is P=48–2Q and the cost function is C=Q2. 1 Calculate...

The inverse market demand for clothing is P=48–2Q and the cost function is C=Q².

1 Calculate the optimal profit of a monopolist.

Assume now that the monopolist can choose whether to continue operating in the market as a monopolist or set up two branches that operate in the market as Cournot duopolists (duopolist branching). Each branch will face the same quadratic cost function as the original monopolist.

2 Calculate the optimal profit under the duopoly branching. Will the firm prefer to produce with one or two branches? Explain whether this is counter intuitive.

3 Every unit of output Q generates a social cost of 10. The government chooses to pass on that cost to the firm as a lump sum to pay. In this situation, does the firm prefer to produce with one or with two branches operating as Cournot duopolists?

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Expert Solution

Rahul Sunny answered 1 week ago

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