Imperfect Competition End of Chapter Problem

Two organic emu ranchers, Bill and Ted, serve a small metropolitan market. Bill and Ted are Cournot competitors, making a conscious decision each year regarding how many emus to breed. The price they can charge depends on how many emus they collectively raise and demand in this market is given by=150

Q=150P. Bill raises emus at a constant marginal and average total cost of $10; Ted raises emus at a constant marginal and average total cost of $20.

a.Find the Cournot equilibrium quantity, price, profits, and consumer surplus.

Q=

P= $

B= $

T= $

CS= $

b.Suppose that Bill and Ted merge, and become a monopoly provider of emus. Further, suppose that Ted adopts Bill's production techniques. Find the monopoly quantity, price, profits, and consumer surplus.

QM=

PM= $

M= $

CSM= $

c.Suppose that instead of merging, Bill considers buying Ted's operation for cash. How much should Bill be willing to offer Ted to purchase his emu ranch? (Assume the combined firms would operate for only one period.)

$1,600 $2,400 $800 $4,050

d.Would the combination of the two ranches be good or bad for society overall?

Bad, because there is a loss in emu variety in going from two producers to one.

Good, because production will now be concentrated in the hands of the more efficient producer.

Good, because the increase in industry profits would outweigh the sum of the decrease in consumer surplus and an increase in deadweight loss.

Bad, because the increase in industry profits would be outweighed by the sum of the decrease in consumer surplus and an increase in deadweight loss.