Question
The questions below will sometimes make use of the following hypothetical market framework: Consider the case when we have two rms in an industry, and
The questions below will sometimes make use of the following hypothetical market framework: Consider the case when we have two rms in an industry, and that that market demand is given by P = 1/2 Q1 1/2 Q2, where is a demand parameter, and that the total costs for rms 1 and 2 are given by, respectively, T C(Q1) = cQ1, T C(Q2) = cQ2, where c represents the marginal costs of each rm. In this case, the best responses for rms 1 and 2 are given by, respectively, Q1 = c 1/2 Q2, Q2 = c 1/2 Q1. Question 1 As mentioned in the framework above, the term is a demand parameter which is taken to be positively related to increases to the size of market demand. Suppose that marginal costs in this case are given by c = 1 for each rm, but allow to remain an undetermined parameter. First, solve for the equilibrium market price. Next, use this as a guide in order to give an explanation as to what was observed in terms of the price in the toilet paper market following the spread of the COVID-19 virus. Would you expect to be higher or lower after the crisis, and why? (Your answer should include your calculation and discussion of demand, as well as any
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