Question

A firm currently enjoys a patent-protected monopoly for its hair restoration drug and faces the following inverse demand curve: ? = 3,000 − 2? And a marginal cost of producing of c = $600. The firm’s patent is about to expire and it is faced with a potential new entrant. For these you can solve the profit maximization problem or plug in the appropriate formulas, but show your work either way.

a) What is the firm’s current monopoly price, quantity, and profit?

b) If a new firm enters the market and the two firms compete by choosing quantity (as in the Cournot model), what will be each firm’s quantity, price, and profit? (Hint: Remember to add up the two firms’ quantities when solving for price.)

c) If the two firms compete on price (as in the Bertrand model), what will be each firm’s quantity, price, and profit?

d) Graph the demand curve, monopoly marginal revenue curve, monopoly price (pM) and quantity (Q M), Cournot price (pC ) and (total) quantity (Q C ) and Bertrand price (pB ) and quantity (pB ) on the graph below. In which is the deadweight loss highest? In which is it lowest?

Answer 1