Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

(Industry equilibrium when entry is costly) Consider a market with inverse demand function p(Q) = 55 - 2Q, where Q = _ _qi, where N

image text in transcribed
image text in transcribed
(Industry equilibrium when entry is costly) Consider a market with inverse demand function p(Q) = 55 - 2Q, where Q = _ _qi, where N is the number of firms. Firms have constant marginal cost c = 5 per product and fixed cost K = 2 to enter the market. Firms compete by simultaneously choosing quantities. (a) Assume that there are N = 2 firms, and that they play a simultaneous-moves Nash-in-quantities game. Write down expressions for each firm's profits as a function of q, and q2. Use them to find the firms' best response functions and therefore their equilibrium quantities and profits. Calculate also consumer surplus. (b) Now suppose there are N firms in the market. Derive the Nash equilibrium prices, quantities and profits. (c) Suppose now that / is a continuous number and that firms play the following game. (1) They decide whether to enter or not and if so they incur the cost K. (2) Firms which have entered will set quantities. How many firms will enter at equilibrium? (Hint: solve by backward induction!) How would the equilibrium number of firms change if the entry cost K increased

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

Principles Of Financial Accounting

Authors: John J Wild, Ken W Shaw, Barbara Chiappetta

22nd Edition

0077632893, 9780077632892

More Books

Students also viewed these Economics questions