Reference no: EM1344564
1. Firm A is the dominant firm in a market where industry demand is given by Qd= 48 - 4P. There are four "follower" firms, each with long-run marginal cost given by MC= 6 + Qf. Firm A's long-run marginal cost is 6.
(a). Write the expression for the total supply curve of the followers (Qs) as this depends on price. (Remember, each follower acts as a price taker.)
(b). Find out the net demand curve facing firm A. Describe A's optimal price and output. Explain how much output do the other firms supply in total?
2. Two firm's produce differentiated products. Firm 1 faces the demand curve Q1= 75 - P1 + .5P2. (Note that a lower competing price robs the firm of some, but not all, sales. Thus, price competition is not as extreme as in the Bertrand model). Firm 2 faces the analogous demand curve Q2= 75 - P2 + .5P1. For each firm, AC= MC= 30.
With this information, Now suppose instead that these firms compete by setting quantities rather than prices. All other facts are the same. It is possible to rewrite the original demand equations as P1= [150 - (2/3)Q2] - (4/3)Q1 and P2= [150 - (2/3)Q1] - (4/3)Q2. In other words, increases in the competitor's output lowers the intercept of the firm's demand curve.
(a) Set MR1= MC to confirm that firm 1's optimal quantity depends on Q2 according to Q1= 45 - .25Q2. Explain why an increase in one firm's output tends to deter production by the other.
(b) In equilibrium, the firms set identical quantities: Q1=Q2 Find the firm's equilibrium quantities, prices and profits.
(c). COmpare the firm's profits under quantity competition and price competition (beginning paragraph). Provide an intuitive explanation for why price competition is more intense (i.e. leads to lower equilibrium profits.)
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