Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Consider the following market demand and production cost functions. (1) P = 10,000 - 2.5Q (2) TC = 5Q (1) (3 points) Derive the firms'

Consider the following market demand and production cost functions.

(1) P = 10,000 - 2.5Q

(2) TC = 5Q

(1) (3 points) Derive the firms' quantity-response functions under Cournot duopoly. Show the derivation steps.Calculate firms' equilibrium quantities, market price, total market quantity, and firms' profits. These represent the pre-regulation market equilibrium.

(2) (3 points) A new regulation mandates cleanup. Now, each firm has to incur a marginal cleanup cost of $2.5 per unit produced. Note that the firm now has a marginal production cost as before, and a new marginal cleanup cost for each unit produced. Calculate the new equilibrium quantities, market price, total market quantity, and firms' profits. These represent the post-regulatory short-run equilibrium.

(3) (4 points) Next, the firms move to innovate and improve production efficiency to counteract the cleanup costs. These initiatives potentially result in reduction in marginal cleanup costs and/or marginal production costs. From the post-regulatory cost structure noted in #2 above, suppose the firms attain a 50% reduction in marginal cleanup costs, and another 25% reduction in in marginal production costs as part of their longer-run benefits from cleaner production. Calculate firms' equilibrium quantities, market price, total market quantity, and firms' profits. These represent the post-regulatory longer-run equilibrium.

(4) (2 points) Discuss the effects of the regulation on the two firms under Cournot competition, using the numbers calculated above. Be precise.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Econometric Evaluation Of Socio-Economic Programs Theory And Applications

Authors: Giovanni Cerulli

1st Edition

3662464055, 9783662464052

More Books

Students also viewed these Economics questions