Question

Suppose that there are two energy firms with identical technology, where their marginal cost is MC = 100 - Q/5. Let the marginal willingness to pay for energy be MWTP = 310 - 4Q/5 (and the marginal revenue is MR = 310 - 8Q/5).

a) If there was only one firm supplying energy, and this firm was acting as if the market was competitive, how much energy would be supplied?

b) If the two firms are supplying energy, and both are acting as if the market was competitive, how much energy would be supplied?

c) If there was only one firm supplying energy, and this firm was acting like a monopolist, how much energy would be supplied?

Answer 1

a) If there was only one firm supplying energy and acting as if the market is competitive: They will supply until MC=100-Q/5 becomes equal to the MWTP=310-4Q/5

100-Q/5=310-4Q/5

3Q/5=210

Q=350

So a total of 350 will be supplied by the one firm

b) If there were two firms supplying assuming a competitive market, the market will have twice the Output which will be reflected in the marginal willingness to pay

Each firm will produce until Their MC=the market's marginal willingness to pay

MC=100-Q/5=310-4(2Q)/5

7Q/5=210

Q=150

So each firm will supply 150 and total supply will be 150*2=300

c) If there was only one firm supplying and acting as a monopolist, it will supply until its Marginal cost equals its marginal revenue

MC=100-Q/5=310-8Q/5

Q=150

So the monopolist firm will supply energy of Q= 150

Hope it's clear. Do ask for any clarifications required.