Question
Suppose the market demand for a homogeneous product is given by P = a - bQ, where a and b are positive constants. There are
Suppose the market demand for a homogeneous product is given by P = a - bQ, where a and b are positive constants. There are n identical firms, each of which is capable of producing the product at constant marginal cost c > 0. Assume c < a. Suppose the firms compete in quantity in Cournot fashion. Compute the equilibrium price, quantities, consumer surplus (CS), total profits (TP), total surplus (TS) and deadweight loss (DWL).
What is the size of DWL in relation to TP? Provide comparative static exercises of the equilibrium price and quantity and these welfare measures with respect to n and discuss the implications of the comparative static exercises.
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