Question

Suppose in a market, for the typical firm P = 20 - q - b(n - 1)q and TC = 2q, where P is the price of output q, b is a parameter determining how sensitive a firm’s output price is to the output of its (n - 1) competitors/rivals, where n is the number of firms in the market, TC is the total cost of production, and q=Q=industry/market output. a. Suppose n = 1 and this market was occupied by a single profit-maximizing Monopolist (e.g. Q = q), how much output would be produced? What price would be charged? How much profit would be earned? b. Suppose b = 0 and this market was occupied by a very large number of profit-maximizing Perfectly Competitive Firms (e.g. Q = q for the industry), how much output would be produced? What price would be charged? How much profit would be earned?

Solve this question ---------- 2. Refer back to #1 and suppose that the industry consists of Monopolistically Competitive firms that face (n-1) = 2 other competitor/rivals, where b = 1/2 and q = Q. a. How much output would be produced by a typical firm? What price would be charged? How much profit would be earned? How much output would the industry/market produce? b. What, theoretically, explains the differences in the pricing/output decisions across the three market structures considered in questions 1 - 2?

Answer 1

In the second case when (n-1) = 2, total industry output will be 40.5 + 40.5 = 81, As in this case there is two firms.

In these three market structure we get the according to its market conditions. In monopoly there price is higher than perfect competition and output is less than perfect competition. Similarly in monopolistic competition price is higher than perfect competition and here the output is equally divided among the producers.