(a) [15 marks] Consider two identical firms with no fixed costs and constant marginal cost c...

(a) [15 marks] Consider two identical firms with no fixed costs and constant marginal
cost c which compete in quantities in each of an infinite number of periods. The
quantities chosen are observed by both firms before the next round of play begins.
The inverse demand is given by p = 1 − q1 − q2, where q1 is the quantity produced by
firm 1 and q2 is the quantity produced by firm 2. The firms use ‘trigger strategies’ and
they revert to static Cournot behaviour if cooperation breaks down. Derive the lowest
value of the discount factor such that the firms can sustain the monopoly output level
and discuss the economic reasoning behind your result.

Solutions

Expert Solution

**if you liked the answer, then please upvote. Would be motivating for me. Thanks.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Consider a price-setting oligopoly with 4 identical firms, all with constant marginal cost c. The firms...

Consider a price-setting oligopoly with 4 identical firms, all with constant marginal cost c. The firms compete for an infinite number of periods and have the same discount factor. Derive the minimum discount factor such that there exists a collusive equlibirum with monopoly pricing.

Suppose that identical duopoly firms have constant marginal costs of $16 per unit. Firm 1 faces...

Suppose that identical duopoly firms have constant marginal costs of $16 per unit. Firm 1 faces a demand function of: q1=70-2(p1)+1(p2) where q 1 is Firm 1's output, p1 is Firm 1's price, and p 2 is Firm 2's price. Similarly, the demand Firm 2 faces is: q2=70-2(p2)+1(p1) Solve for the Bertrand Equilibrium: In equilibrium (p1) equals _ and (p2) equals _

Consider an industry in which all firms have constant marginal costs of 50, MC = 50,...

Consider an industry in which all firms have constant marginal costs of 50, MC = 50, and market demand is Qd = 385 - 0.5P (a) If there are two firms operating as Cournot duopolists, find the equilibrium price and total quantity (b) If there are two firms operating as Stackelberg duopolists, find the equilibrium price, how much the leader firm produces and how much the follower firm produced?

When marginal product is increasing: Marginal cost is increasing c. marginal cost is constant Marginal cost is...

When marginal product is increasing: Marginal cost is increasing c. marginal cost is constant Marginal cost is decreasing d average product is decreasing

All firms in an industry are identical with fixed costs (FC) of $160 and variable costs...

All firms in an industry are identical with fixed costs (FC) of $160 and variable costs (VC) of $22q + 0.1q^2 What is the equation of average variable costs? What is the equation of average total costs? What is the equation of marginal costs? At what level of output are average total costs at their minimum? At what level of output are average variable costs at their minimum? What is the equation of this firm’s short-run supply curve? Explain all...

Consider two firms that provide a differentiated product, which they produce at the same constant marginal...

Consider two firms that provide a differentiated product, which they produce at the same constant marginal cost, MC = 3 (no fixed cost). The demand function for Firm 1 is q1 = 10 – p1 + 0.5p2 and for Firm 2 is q2 = 20 – p2 + 0.5p1, where p1 is Firm 1’s price and p2 is Firm 2’s price. a) Write the profit functions for these firms.( 8 marks) b) What are the equilibrium prices and quantities? (...

Sue and Jane own two local gas stations. They have identical constant marginal costs, but earn...

Sue and Jane own two local gas stations. They have identical constant marginal costs, but earn zero economic profits. Sue and Jane constitute: a Sweezy oligopoly. a Cournot oligopoly. a Bertrand oligopoly. None of the answers is correct. Consider the following information for a simultaneous move game: If you advertise and your rival advertises, you each will earn $5 million in profits. If neither of you advertises, you will each earn $10 million in profits. However, if one of you...

Two firms compete under Cournot competition with constant marginal costs c1 = 2 and c2 =...

Two firms compete under Cournot competition with constant marginal costs c1 = 2 and c2 = 4. The market demand is P=18-Q . a) Compute the market share of each firm, the market price, and the total quantity produced in the market. b) [CHALLENGING] You later hear that the marginal cost of firm 2 increased, and realize that the market price is now P = 9. What is the new marginal cost c2 ?

Consider an industry with two firms, each having marginal costs and total costs equal to zero....

Consider an industry with two firms, each having marginal costs and total costs equal to zero. The industry demand is P = 100 − Q where Q = Q1 + Q2 is total output. 1. Find the cartel output and cartel profits assuming that the firms share the profit equally. Hint: In cartels, firms behave as if they are a monopoly. Hence, the cartel quantity is at the point where MR = MC. After finding the quantity, use the demand...

Suppose two firms are in Bertrand Competition. Both firms have a specific marginal cost of c...

Suppose two firms are in Bertrand Competition. Both firms have a specific marginal cost of c = 5. a.) Show that ( p∗1 , p∗2 ) = (5,5) is the unique Nash equilibrium. b.) Now, suppose that the firms can only set their prices to the nearest cent (i.e., their pric- ing decision is now discrete instead of continuous). There are now three Nash equilibria: (p∗1, p∗2)= (5,5) from before, and two more. Describe the two new Nash equilibria. c.)...

Subjects