Question

Question .

Consider the market for the homogenous good “space dust” with the following inverse demand function: ?(?) = 12 − ? where y is total sold quantity of the good on the market and ?(?) is the price for which it sells. Due to Imperial regulations and restrictions there are only two firms on this market, “Lando inc” and “Jabba enterprises”, who both produce this homogenous good.

Lando’s cost function is ?? (?? ) = 2?? and Jabba’s cost function is.

??(??) = 2?? . The two firms set their production quantities simultaneously without knowing the choice of their opponent, but both firms know the inverse demand function and each other’s cost function.

a) Derive both firms’ best response functions and draw these in a diagram.

b) What quantities will each firm produce in the equilibrium? Illustrate these quantities in the diagram from a). What is the total quantity produced and what is the equilibrium price?

The same two firms are also active in another market, the market for intergalactic “internet access” (this is also a completely homogenous good). This market is characterized by price competition, that is, either firm can supply the entire market demand if called upon to do so. The market demand function for internet access is ?(?) = 12 − ? where z is total sold quantity of internet access and p is the market price of internet access. Customers will buy from the firm with the cheapest internet access. Should the firms offer the same price, they will then share the market equally. Lando’s cost function is ?? (?? ) = 2?? and Jabba’s cost function is ??(??) = 2?? .

c) What quantities of internet access will the firms produce in equilibrium? What is total quantity sold and what is the equilibrium price? Explain any possible differences between the “space dust” and the “intergalactic internet access” markets.

Answer 1