6. Consider a duopoly in which inverse demand is given by P= 100-Q, where Pis the price and Q is aggregate output. The marginal cost of each firm is initially equal to 55 and there are no fixed costs. The firms compete by simultaneously setting quantities. (a) What is the equilibrium quantity of each firm, the equilibrium price and the profit of each firm? Now assume that one of the firms, firm 1, develops a new technology that reduces its own marginal cost to 25. (b) If firm 1 keeps this innovation for itself (so that the marginal cost of firm 2 is still 55), what will be the new equilibrium levels of output, price and profits of the two firms? What is the consumer surplus in the market? Do consumers benefit from the innovation? 11011 (d) Finally, assume that firm 1 agrees to make its innovation available to firm 2 in return for an understanding that the two firms tacitly collude in the product market. In this case no royalty fees will be paid. Collusion will result in the monopoly price being charged and the monopoly quantity being produced, with firm 1 selling a market share and firm 2 selling a market share 1-2, where is decided by firm 1. Assuming collusion is sustainable and will go undetected, does firm 1 have an incentive to propose such an agreement? Does firm 2 have an incentive to accept?
6. Consider a duopoly in which inverse demand is given by P= 100-Q, where Pis the price and Q is aggregate output. The marginal cost of each firm is initially equal to 55 and there are no fixed costs. The firms compete by simultaneously setting quantities. (a) What is the equilibrium quantity of each firm, the equilibrium price and the profit of each firm? Now assume that one of the firms, firm 1, develops a new technology that reduces its own marginal cost to 25. (b) If firm 1 keeps this innovation for itself (so that the marginal cost of firm 2 is still 55), what will be the new equilibrium levels of output, price and profits of the two firms? What is the consumer surplus in the market? Do consumers benefit from the innovation? 11011 (d) Finally, assume that firm 1 agrees to make its innovation available to firm 2 in return for an understanding that the two firms tacitly collude in the product market. In this case no royalty fees will be paid. Collusion will result in the monopoly price being charged and the monopoly quantity being produced, with firm 1 selling a market share and firm 2 selling a market share 1-2, where is decided by firm 1. Assuming collusion is sustainable and will go undetected, does firm 1 have an incentive to propose such an agreement? Does firm 2 have an incentive to accept?
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter10: Monopolistic Competition And Oligopoly
Section: Chapter Questions
Problem 3SCQ: Consider the curve in the figure below, which shows the market demand. marginal cost, and marginal...
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Transcribed Image Text:6. Consider a duopoly in which inverse demand is given by P= 100-Q, where Pis
the price and Q is aggregate output. The marginal cost of each firm is initially equal
to 55 and there are no fixed costs. The firms compete by simultaneously setting
quantities.
(a)
What is the equilibrium quantity of each firm, the equilibrium price
and the profit of each firm?
Now assume that one of the firms, firm 1, develops a new technology that reduces
its own marginal cost to 25.
(b)
If firm 1 keeps this innovation for itself (so that the marginal cost of
firm 2 is still 55), what will be the new equilibrium levels of output, price and
profits of the two firms? What is the consumer surplus in the market? Do
consumers benefit from the innovation?
(d)
Finally, assume that firm 1 agrees to make its innovation available
to firm 2 in return for an understanding that the two firms tacitly collude in the
product market. In this case no royalty fees will be paid. Collusion will result in
the monopoly price being charged and the monopoly quantity being produced,
with firm 1 selling a market share and firm 2 selling a market share 1-2,
where is decided by firm 1. Assuming collusion is sustainable and will go
undetected, does firm 1 have an incentive to propose such an agreement?
Does firm 2 have an incentive to accept?
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