Question

Enter either (stay the same, no change, increased, or decreased) in the blank spaces.

Suppose that two competing firms, A and B, produce a homogenous good. Both firms have a marginal cost of MC=$70. Describe what would happen to output and price in each of the following situations if the firms are at the (i) Cournot Equilibrium, and (ii) Bertrand equilibrium.  

Firm A must decrease wages, decreasing its marginal cost to $50.  

At the Cournot equilibrium, the quantity produced by firm A will ___ , the quantity produced by Firm B will ___, the totally quantity produced will ___, and the market price will ___.

At the Bertrand equilibrium, the quantity produced by Firm A will ___, the quantity produced by Firm B will ___, the total quantity produced will ___, and the market price will ___.

Instead, suppose the marginal cost of both firms decreases.

At the Cournot equilibrium, the quantity produced by Firm A will ___, the quantity produced by Firm B will ___, the total quantity produced will ___, and the market price will ___.

At the Bertrand equilibrium, the quantity produced by Firm A will ___, the quantity produced by Firm B will ___, the total quantity produced will ___, and the market price will ___.

Instead, suppose the demand curve shifts to the right.

At the Cournot equilibrium, the quantity produced by Firm A will ___, the quantity produced by firm B will ___, the total quantity produced will ___, and the market price will ___

At the Bertrand equilibrium, the quantity produced by Firm A will ___, the quantity produced by Firm B will ___, the total quantity produced will ___, and the market price will ___.

Enter either (stay the same, no change, increased, or decreased) in the blank spaces.

Answer 1

1. At the Cournot equilibrium, the quantity produced by firm A will increase , the quantity produced by Firm B will decrease , the totally quantity produced will decrease , and the market price will increase.

Explanation:

In a Cournot equilibrium, the effect is found by reaction functions. When firm A experiences a decrease in marginal cost, their reaction function will shift outwards ( as now it can produce more due to low cost). The quantity produced by firm A will increase and the quantity produced by firm B will decrease. Total quantity produced will tend to decrease and price will increase.

2. At the Bertrand equilibrium, the quantity produced by Firm A will increase , the quantity produced by Firm B will decrease to zero units , the total quantity produced will remain same , and the market price will remain same .

Explanation:

Given that the good is homogeneous, both will produce where price equals marginal cost. Firm A will decrease price to $50 and firm B will keep its price at $70. Assuming firm A can produce enough output, they will supply the entire market.

Instead, suppose the marginal cost of both firms decreases.

3. At the Cournot equilibrium, the quantity produced by Firm A will increase , the quantity produced by Firm B will increase , the total quantity produced will increase , and the market price will decrease .

Explanation:

The decrease in the marginal cost of both firms will shift both reaction functions outwards. Both firms will increase quantity produced and price will decrease.

4. At the Bertrand equilibrium, the quantity produced by Firm A will increase , the quantity produced by Firm B will increase , the total quantity produced will increase , and the market price will decrease .

Explanation:

In this case, price will decrease and quantity produced will increase.

Instead, suppose the demand curve shifts to the right.

5. At the Cournot equilibrium, the quantity produced by Firm A will increase , the quantity produced by firm B will increase , the total quantity produced will increase , and the market price will increase

Explanation:

In this case, both reaction functions will shift outwards and both will produce a higher quantity. Price will tend to increase

6. At the Bertrand equilibrium, the quantity produced by Firm A will increase , the quantity produced by Firm B will increase , the total quantity produced will increase , and the market price will not change .

Explanation:

Both firms will supply more output. Given that marginal cost is constant, the price will not change.