Question
Firm A sells a good and faces an inverse demand curve of P = 120 - Q, has constant marginal costs of 60 and no
Firm A sells a good and faces an inverse demand curve of P = 120 - Q, has constant marginal costs of 60 and no fixed costs.
(a) How much will the Firm A produce? What is the profit maximizing price and what are the Firm A's profits?
(b) A competitor (Firm B) enters the market and sells an identical good. The two firms choose quantities a single time, and pick Qa and Qb simultaneously after the firm B has entered the market. What is the equilibrium price and how much will Firm A and Firm B produce?
(c) For each of the following four situations: (1) state whether you would expect quantities Qa and Qb to rise, stay the same or fall, and (2) provide a brief (two to three sentence maximum) explanation. Note: I'm not looking for nor expecting *any* calculation here. A brief explanation of how and why Qa and Qb might change is perfectly sufficient.
(c1) Qa and Qb both have to pay fixed costs F>0. Both firms choose to compete in the market and choose quantities simultaneously, just like in part (b).
(c2) Fixed costs are zero, but A is an incumbent who can commit to a quantity before B enters.
(c3) The two firms compete as in part (b), but do so repeatedly, rather than just once.
(c4) The firms compete a single time, but compete by setting the price of the identical product rather than the quantity.
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