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Suppose that inverse demand is given by p(Q) = a-Qb, where Q is the total quantity supplied in the market. There are two firms in the market, each with a cost function of c(q) = QC

A) If we were to assume that firms competed in prices instead of quantities, what would change about the nature of competition between the two firms?

B) Explain how capacity constraints or product differentiation could change the answer to Question A

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Chika Ilonah
Chika IlonahLv10
28 Sep 2019

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Related questions

Suppose mountain spring water can be produced at no cost and the inverse demand for mountain spring water is P = 1200 - 0.2Q. Answer the following questions.


a. Suppose the market of mountain spring water is supplied by a monopoly firm that cannot price discriminate. Find the monopoly firm's profit-maximizing price and quantity of production. (10 pts.) [Hint: MR = P + (P/Q)*Q]


b. Suppose the market of mountain spring water is supplied by two firms (Firm A and firm B) that behave like a Cournot duopoly. Find the Nash Equilibrium price and quantity of production for each firm. (10 pts.) [Hint: Q = QA + QB; MRA = P + ((P/QA)*QA and MRB = P + ((P/QB)*QB]


c. Suppose the market of mountain spring water is supplied by two firms (firm A and firm B) that behave like a Stackelberg duopoly where firm A is the leader and firm B is the follower. Find the Nash Equilibrium price and quantity of production for each firm. (10 pts.) [Hint: Q = QA + QB; MRA = P + ((P/QA)*QA and MRB = P + ((P/QB)*QB]

Let the inverse demand curve be p(q) = a - bq. Suppose there are two firms, with a constant marginal cost equal to C.

Now suppose that the two firms engage in price competition (set p) instead of quantity competition (set q).

A) (Bertrand) If both firms move simultaneously, what are their equilibrium strategies, and what is the equilibrium outcome?

B) If the firms have different marginal costs, how does your answer to part A change?

16 points) Consider a homogenous good market with the following market demand curve: Q=100-p

Two firms produce output at a constant marginal cost = 10. Derive the Nash equilibrium outcome in terms of prices, outputs, and the profits of the two firms under the following alternative situations in a)-d)

a) (3 points) Firms engage in Bertrand price competition with no capacity constraints.

b) (3 points) Firms engage in Bertrand price competition and each firm has a maximum production capacity = 15.

c) (2 points) How would your answer in part (b) change if the capacity of each firm is 90?

d) (5 points) Firms engage in Cournot quantity competition (i.e., determine their capacity assuming that the price is such that market demand equals industry capacity).

e) (3 points) Compare the industry output in cases (a) and (d) to the socially optimal and the monopoly output levels.

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