A monopolist in the natural gas ma rket can produce at a constan t average (and...

A monopolist in the natural gas ma rket can produce at a constan t average (and marginal) cost of AC = MC = $5 . It faces a market demand curve given by Q = 53 ? P . a. Find the profit-maximizing price and quantity for this monopolist. What are its profits? b. Suppose a second firm enters the market. Let Q 1 be the output of the first firm and Q 2 be the output of the second. Ma rket demand is now given by Q 1 + Q 2 = 53 ? P . Assuming that this second firm has the same costs as the first, write th e profits of each firm as functions of Q 1 and Q 2 . c. Suppose (as in the Cournot model) that each firm chooses its pr ofit-maximizing level of natural gas output based on the assumption that its competitor’ s output is fixed. Find each firm’s “reaction curve” (i.e., the rule that gives its desired output in terms of its competitor’s output). d. Calculate the Cournot equilibri um (i.e., the values of Q1 and Q 2 for which each firm is doing as well as it can given its competitor’s output). What ar e the resulting market price and profits of each firm?

Expert Solution

Rahul Sunny answered 2 years ago

A monopolist can produce at a constant average and marginal cost of ATC = MC =...

A monopolist can produce at a constant average and marginal cost of ATC = MC = $5. It faces a market demand curve given by Q = 53 - P. 5. Suppose there are N firms in the industry, all with the same constant MC = $5. Find the Cournot equilibrium. How much will each firm produce, what will be the market price, and how much profit will each firm earn? Also show that as N becomes large, the market...

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