Question

Cournot, Market Power and Market Concentration. Consider a market in which there are two firms who face the inverted industry demand given by P = 260– Q. Each firm has zero fixed cost and constant marginal cost given by c1 for Firm 1 and c2 for firm 2.

1. Let c1=c2= 170. Solve for the Cournot equilibrium outputs. Use you solution to calculate the (i) Herfindahl index (H) (ii) Lerner Index (L) and (iii) industry elasticity (n) and (iv) Welfare (W). Verify that L = H/n

2. Let c1= 150 and c2= 190. Repeat part a). Show that the increase in the variance of marginal cost has caused H, L and W to rise

Answer 1

So H, L , W rise, proved