Question

Consider a market where n firms are engaged in quantity competition (also known as Cournot competition), where n is a natural number. Each firm has the same cost structures given by c(y)= 10 + 2y3 What will the profits for each firm be as n gets larger and larger? In other words, what will the profits of each firm be as n approaches infinity?

Answer 1

Ans:

As number of firms gets larger and larger and approach infinity, the market becomes perfectly competitive. Since there are large number of firms, competition is intense and market structure approaches perfect competition.

Under perfect competition, each firm takes price as given as it does not have price influencing market power on its own.

Profit maximization occurs at:

Price = Marginal cost.

So, we have:

gives:

In long run, firms tend to charge price at:

P = min(Long run average cost)

As a result, each and every firm earns normal profits i.e. zero supernormal profits.

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