1. Suppose we have a duopoly in the production of mineral spring water. Each fir

Question

1. Suppose we have a duopoly in the production of mineral spring water. Each firm has the same cost structure where MC(Q) = 10. The market demand for mineral spring water is given by:

P = 70 - Q/50

Each firm, wishing to maximize profits, assumes that the other firm will not change his current level of production. What will be the final level of production for the market (after a Cournot equilibrium is reached)? How much is produced by each firm? How much profit is earned by each firm?

2. If we had efficiency in the duopoly described in question above, what would the market quantity
and price be? How does this compare to your answer for the question above?

Explanation / Answer

If both the players compete with each other , neither will make a profit as they have same MC. The player which can reduce the MC with large production( economy of scale) , will be able to generate profit.

At the equillibrium Price=Marginal Cost P=70-Q/50=10 or Q/50=70-10=60 or Q=50*60=3000 Each firm will produce=3000/2 1500 Profit of each firm=(10-10)*15000 0

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.