In: Economics
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?