Problem # 2 (9 points): Consider two identical firms (A and B) that face the fol

ID: 1258749 • Letter: P

Question

Problem # 2 (9 points): Consider two identical firms (A and B) that face the following linear market demand curve and marginal cost:

P = 1200 – Q, where Q = Q1 + Q2 and MC = 0.

Derive firms A and B output-reaction curves.

Calculate the Cournot equilibrium quantity per firm and price in this market.

B. Questions/Short Answers (12 points)

1. What is the distinguishing characteristic of oligopoly in relation to other forms of market organizations?

2. What are the advantages of the HHI over concentration ratios in measuring the degree of concentration in an industry?

3. What is the Bertrand model? What is its relationship to the Cournot model?

4. What is the Stackelberg model?

P = 1200 - Q

Q = Q1+Q2

P = 1200-Q1-Q2

For Firm A revenue is P*Q1

R = 1200Q1-Q12-Q1Q2

MR = 1200-2Q1-Q2

MC=MR=0

1200-2Q1-Q2=0

So output reaction curve for firm A Q1 = (1200-Q2)/2

Similarly output reaction curve for firm B Q2 = (1200-Q1)/2

Cournot equilibrium is Q1 = (1200-(1200-Q1)/2)/2 = (1200 - (600-Q1/2)/2 = 600-300-Q1/4 = 300-Q1/4

so Q1 = 240 and Q2 = 480

P = 1200-240-480 = 480

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