Question

SCENARIO 3: Consider an industry consisting of two firms producing an identical product. The inverse market demand equation is P = 100 − 2Q. The total cost equations for firms 1 and 2 are TC1 = 4Q1 and TC2 = 4Q2, respectively.

Refer to SCENARIO 3. Suppose that the two firms are Bertrand rivals. The equilibrium level

of output for firm 1 is:

a. 8.

b. 10.

c. 12.

d. 24.

e. None of the above.

Answer #1

Answer - **24 (Option D )**

* In Bertrand model firms determine price simultaneously. When product is homogenous/identical then each firm will charge price equal to marginal cost. This is because if one firm charges price greater than MC then competitors can reduce price slightly to get entire market. This is because products are perfect substitutes. In this situation there will be no incentive for any firm to deviate from their pricing strategy. In that sense it is Nash equilibrium. This result is also known as Bertrand Paradox because despite having only two firm the outcome is similar to competitive market output.

P = MC

100 - 2Q = 4

96= 2Q

Q = 48

**For Firm 1 output is Q _{1} = Q / 2
= 24**

SCENARIO 3: Consider an industry consisting of two firms
producing an identical product. The inverse market demand equation
is P = 100 − 2Q. The total cost equations for firms 1 and 2 are TC1
= 4Q1 and TC2 = 4Q2, respectively.
Refer to SCENARIO 3. Suppose that the two firms are Cournot
rivals. The equilibrium level
of output for firm 1 is:
a. 8.
b. 16.
c. 24.
d. 32.
e. None of the above.

SCENARIO 3: Consider an industry consisting of two firms
producing an identical product. The inverse
market demand equation is P = 100 − 2Q. The total cost equations
for firms 1 and 2 are TC1 = 4Q1 and
TC2 = 4Q2, respectively.
Refer to SCENARIO 3. Suppose that the two firms are Cournot
rivals. Firm 1 will earn a
profit of:
a. $512.
b. $732.
c. $836.
d. $1,014.
e. None of the above.

SCENARIO 3: Consider an industry consisting of two firms
producing an identical product. The inverse market demand equation
is P = 100 − 2Q. The total cost equations for firms 1 and 2 are TC1
= 4Q1 and TC2 = 4Q2, respectively.
9. Refer to SCENARIO 3. Suppose that the two firms are Cournot
rivals. Firm 1’s reaction function is:
a. Q1 = 12 − Q2.
b. Q1 = 12 − 0.25Q2.
c. Q1 = 24 − 0.5Q2.
d. Q1...

SCENARIO 3: Consider an industry consisting of two firms
producing an identical product. The inverse market demand equation
is P = 100 − 2Q. The total cost equations for firms 1 and 2 are TC1
= 4Q1 and TC2 = 4Q2, respectively.
Refer to SCENARIO 3. Firm 1 is the Stackelberg leader and firm 2
is the Stackelberg
follower. The profit of the Stackelberg leader is:
a. $288.
b. $432.
c. $486.
d. $576.
e. None of the above.

Consider an industry consisting of two firms producing an
identical product. The inverse market demand equation is P = 100 −
2Q. The total cost equations for firms 1 and 2 are TC1 = 4Q1 and
TC2 = 4Q2, respectively. Suppose that the two firms are Cournot
rivals. Firm 2 will earn a profit of:
$512.
$732.
$836.
$1,014.
None of the above.

Consider an industry consisting of two firms producing an
identical product. The inverse market demand equation is P = 100 −
2Q. The total cost equations for firms 1 and 2 are TC1 = 4Q1 and
TC2 = 4Q2, respectively.
Firm 1 is the Stackelberg leader and firm 2 is the Stackelberg
follower. The output of the Stackelberg follower is:
6.
12.
24.
48.
None of the above.

Consider an industry consisting of two firms producing
an identical product. The inverse market demand equation is P = 100
− 2Q. The total cost equations for firms 1 and 2 are TC1 = 4Q1 and
TC2 = 4Q2, respectively. Firm 1 is the Stackelberg leader and firm
2 is the Stackelberg follower. The profit of the Stackelberg
follower is:
$864.
$576.
$432.
$288.
$1,152.

SCENARIO 3: Consider an industry consisting of two firms
producing an identical product. The inverse market demand equation
is P = 100 − 2Q. The total cost equations for firms 1 and 2 are TC1
= 4Q1 and TC2 = 4Q2, respectively.
9. Refer to SCENARIO 3. Suppose that the two firms are Cournot
rivals. Firm 1’s reaction function is: a. Q1 = 12 − Q2. b. Q1 = 12
− 0.25Q2. c. Q1 = 24 − 0.5Q2. d. Q1...

Suppose that two firms compete in the same market producing
homogenous products with the following inverse demand function:
P=1,000-(Q1+Q2)
The cost function of each firm is given by:
C1=4Q1
C2=4Q2
Suppose that the two firms engage in Bertrand price
competition. What price should firm 1 set in equilibrium? What
price should firm 2 set? What are the profits for each firm in
equilibrium? What is the total market output?
Suppose that the two firms collude in quantity, i.e.,
acting together...

Consider a Bertrand oligopoly consisting of four firms that
produce an identical product at a marginal cost of $120. The
inverse market demand for this product is P = 500
-2Q.
a. Determine the equilibrium level of output in the market.
b. Determine the equilibrium market price.
c. Determine the profits of each firm.

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