This topic contains a solution. Click here to go to the answer

Author Question: Consider a market with just one firm. The demand in the market is p = 18 Q and the firm has a ... (Read 91 times)

big1devin

  • Hero Member
  • *****
  • Posts: 583
Consider a market with just one firm. The demand in the market is p = 18  Q and the firm has a linear cost function C(Q) = 2Q.
 
  a. How much output will this firm produce. What will be the profit and consumers surplus?
  b. Suppose a second firm with the same cost function enters the market and the two firms compete in a Cournot style (simultaneous output choice). What will be the equilibrium price and quantity in the market? What is the total market profit and CS?

Question 2

Assume a firm is a monopoly and enjoys 10 million in profits per year. The firm lobbies to have a moratorium passed by Congress on new firms in its market for the next 25 years.
 
  If there is no discount rate, how much would the firm be willing to pay to deter entry? A) 250 million
  B) 25 million
  C) 100 million
  D) 250 billion



Related Topics

Need homework help now?

Ask unlimited questions for free

Ask a Question
Marked as best answer by a Subject Expert

Hikerman221

  • Sr. Member
  • ****
  • Posts: 346
Answer to Question 1

a. A monopolist will produce to maximize profits given by:
= (18  Q)Q - 2Q
The derivative w.r.t Q:
- 2Q - 2 = 0
So Q = 8
The price is then 10. The profit is 10(8 ) - 2(8 ) = 64. The Consumer surplus is (18 - 10 )(8 )/2 = 32.
b. Each firm will maximize profit by:
 = (18 - Q - Qo)Q - 2Q
where Q0 is the output of the other firm. The derivative is:
18 - Qo - 2Q - 2 = 0
The best response is:
Q = 8 - Qo/2
Solving both best response functions simultaneously:
Q = 8 - (8 - Q/2 )/2
Q = 16/3 = 5.33. The total market quantity is then 10.66. The price is 18 - 10.66 = 7.34. The profit for each firm is:
5.33 (7.34 ) - 5.33(2 ) = 28.41
The total market profit is then 56.82
The consumer surplus is (18 - 7.34 )(10.66 )/2 = 56.87

Answer to Question 2

A





 

Did you know?

Children with strabismus (crossed eyes) can be treated. They are not able to outgrow this condition on their own, but with help, it can be more easily corrected at a younger age. It is important for infants to have eye examinations as early as possible in their development and then another at age 2 years.

Did you know?

Looking at the sun may not only cause headache and distort your vision temporarily, but it can also cause permanent eye damage. Any exposure to sunlight adds to the cumulative effects of ultraviolet (UV) radiation on your eyes. UV exposure has been linked to eye disorders such as macular degeneration, solar retinitis, and corneal dystrophies.

Did you know?

Women are 50% to 75% more likely than men to experience an adverse drug reaction.

Did you know?

All adults should have their cholesterol levels checked once every 5 years. During 2009–2010, 69.4% of Americans age 20 and older reported having their cholesterol checked within the last five years.

Did you know?

Side effects from substance abuse include nausea, dehydration, reduced productivitiy, and dependence. Though these effects usually worsen over time, the constant need for the substance often overcomes rational thinking.

For a complete list of videos, visit our video library