Reference no: EM131675087

Consider a market of two small breweries located across the street from each other. Market demand is P = 18 - .2Q where Q is the number of beer pints per day. Both firms have a marginal cost of c = 2 per pint. The beers are not differentiated and both firms can serve as many beers as much as needed. The firms compete on price.

1. What is the expected market price? What would be the associated quantity and firm profit?
2. Suppose that one brewery has a marginal cost of c1 = $2.00 but the second brewery changes its production techniques and reduces its marginal cost to c2 = $1.00. Would the market price be different from that in part a? Would firm profits be different? Explain.
3. Suppose there are three breweries on the street. One brewery has a marginal cost of c1 = $2.00 and the second and third breweries have a marginal cost of c2 = c3 = $1.00. Would the market price be different from that in part b? Would firm profits be different? Explain.
4. Going back to a market with two breweries and equal marginal costs of c = $2. If each brewery could only serve 35 pints a day, would you expect the same market price and firm profits as part a? Show any necessary work.
5. Finally, in the market with two breweries and equal marginal costs of c = $2, if consumers showed varying preferences for the beers sold by each brewery, would you expect the market price to differ from part a? Explain. (No calculations needed.).