Question

EC202-5-FY 10 9Answer both parts of this question. (a) Firm A and Firm B produce a homogenous good and are Cournot duopolists. The firms face an inverse market demand curve given by P 10-Q. where P is the market price and Q is the market quantity demanded. The marginal and average cost of each firm is 4 i. 10 marks] Show that if the firms compete as Cournot duopolists that the total in- dustry output is 4 and that if instead the firms merge into a single firm (monopoly), then the total industry output is 3 after the merger. Derive the market price, per firm prot, and consumer surplus when the firms compete as Cournot duopolists and when they merge into a monopoly. Explain the differences in these variables between the duopoly and monopoly markets. ii. [5 marks] Should a regulator who aims to maximize social welfare for this market permit the merger? Explain your answer. (b) [10 marks Firm C and Firm D produce a homogeneous good for the same market. The constant unit cost for each firm is 2. Market demand is completely inelastic: there are 10 consumers, each buys at most one unit of the good and is willing to pay up to 10 for it. The firms are Bertrand duopolists and compete in prices. If they charge the same price they split the corresponding demand equally, otherwise the firm with the lower price gets the whole demand. What is the Nash equilibrium of this game? Explain your answer

Answer 1

(i) N010 BRL (0-9-92-4) = (6-92)9-92 BR= 6-4 EN 4 '| Monopoly. at 8am MR-MC 1o-39 4

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