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Two large firms are about to enter the market for a new pain reliever. Suppose that the demand curve is given by:

Q = 2600 -400 P

Where Q = number of bottles
And P = price per bottle
This means that the marginal revenue function is given by:

MR = 6.5 - 0.005 Q

The marginal cost of producing the pain reliever is a constant $2.00 per bottle.

a. How much would a monopolist produce? What would she charge?

b. What would the output and price be if the market consisted of a Cournot duopoly (each firm having MC = 2 dollars)?

Firm 1's Marginal Revenue curve would be
MR1 = 6.5 - 0.005Q1 - 0.0025Q2
Firm 2's would be
MR2 = 6.5 - 0.005Q2 - 0.0025Q1

You can solve this either algebraically or graphically.

c. What would the output and price be under perfect competition?

Econometrics, Economics

  • Category:- Econometrics
  • Reference No.:- M9694366

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