Consider identical firms competing in a Cournot oligopoly, with cost functions: C(q) = 10q, and corresponding marginal costs of: MC(q) = 10. The market elasticity of demand is: EM = -2. (note: NOT the firmâs elasticity of demand, which is EF!)
a) Suppose you are a monopolist. Solve for the profit-maximizing price. (hint: a monopoly is Cournot competition with only one firm, i.e. where N=1).
b) Now suppose another, identical firm, enters the market. Solve for the new profit maximizing price.
c) As more firms enter, the price falls. How many firms must be in the market for the price to fall below: P = $11? (hint: you can solve this by trial-and-error, i.e. testing a certain number of firms, or by solving directly for N. Try solving for N directly. Also, ð must be an integer.)