1. Two firms compete in Cournot competition. Inverse demand in the market is given by P...

1. Two firms compete in Cournot competition. Inverse demand in the market is given by P = 1500 − 3 Q and each firm has constant marginal cost c = 420.

a) Assuming there are no fixed costs, find the Cournot equilibrium market price and quantities produced by each firm. (20 points)

b) Now suppose that each firm faces a non-sunk fixed cost of 20,000 if they produce at all. Would the firms still want to produce the amounts you found in part a? (5 points)

c) Now suppose that each firm faces a non-sunk fixed cost of 50,000 if they produce at all. Suppose that firm 1 is producing 180 units of output. Taking firm 1's level of output as given, would it be worthwhile for firm 2 to enter the market if they produce their best response level of output? (5 points)

d) Is it worthwhile for firm 1 to stay in the market, given the fixed cost of 50,000, if firm 2 produces zero? (5 points) Hint: 180 is the optimal monopoly output in this market.

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Rahul Sunny answered 1 year ago

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