Reference no: EM132402522

Question: Consider a market for a homogeneous product with demand given by Q=1000-1000p.

a. Suppose that marginal cost for the market equals 28 cents (so MC=0.28). There are no fixed costs. Determine the prevailing price, quantity, and social welfare (consumer surplus) under perfect competition (efficient production).

b. Draw a graph showing the equilibrium in a. Show the equilibrium price and quantity, and the consumer surplus.

c. Determine the prevailing price, quantity, and social welfare under a non-discriminating monopoly assuming that the marginal cost for the monopolist is equal to 28 cents. (Hint: Social welfare is the sum of the monopoly's profits plus the consumer surplus.)

d. Draw a graph showing the equilibrium in c. Show the equilibrium price and quantity, and the deadweight loss of the monopoly.

e. Now suppose there are two firms, each with constant marginal cost equal to 28 cents. Determine the equilibrium price and quantities produced by each firm under Cournot equilibrium (oligopoly). Determine the social welfare (sum of the profits of each firm plus consumer surplus).

f. Draw two graphs showing the Cournot equilibrium: i) using market demand demand, residual demands, and marginal cost of one of the firms; ii) using best-response functions of the firms.

g. Compute the Cournot duopoly efficiency loss as a percentage of the efficiency loss under monopoly (Hint: Using competition as a benchmark, compute the deadweight loss of the monopoly and the deadweight loss of the Cournot duopoly. Then take the ratio, that is, divide the deadweight loss under the duopoly by the deadweight loss under monopoly.)