Suppose the inverse market demand for manufactures is P(Q) = A – Q, where P and Q denote price and total goods produced and the parameter A denotes the size of the domestic market. Suppose any firm has a cost function, c(q) = cq, where A > c. Suppose there are two firm in the market which produce q1 and q2, where Q = q1 + q 2 a. Solve for the Cournot equilibrium levels of output (Q), price (P) and markups. b. What is the impact of an increase in market size, A, on Q, P and markups when there are two firms? Provide some intuition for these predictions. c. Suppose a third firm enters so that Q = q1 + q2 + q3. What is the impact of entry on Q, P and markups? And why?

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Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose the inverse market demand for manufactures is P(Q) = A – Q, where P and Q denote price and total goods produced and the parameter A denotes the size of the domestic market. Suppose any firm has a cost function, c(q) = cq, where A > c. Suppose there are two firm in the market which produce q₁ and q₂, where Q = q₁ + q₂a. Solve for the Cournot equilibrium levels of output (Q*), price (P*) and markups. b. What is the impact of an increase in market size, A, on Q*, P* and markups when there are two firms? Provide some intuition for these predictions. c. Suppose a third firm enters so that Q = q₁ + q₂+ q₃. What is the impact of entry on Q*, P* and markups? And why?

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