Consider the demand for boccie balls shown in the diagram below. Demand is given by P = 80 - Q. Boccie balls can be produced at a constant marginal and average total cost of $20.
a. If the boccie ball industry were perfectly competitive, what quantity would be sold, and what price would prevail in the market?
b. Suppose that the boccie ball industry were a monopoly. Draw in a marginal revenue curve and determine the profit-maximizing quantity.
i. Divide the monopoly (one-firm) quantity by the competitive quantity to determine the proportion of competitive output that a monopolist provides. Present your answer in reduced fractional form.
ii. Determine the price, and draw a dot on the demand curve indicating the monopolist's price and quantity.
c. Suppose the boccie ball industry were a Cournot duopoly (two-firm), with two firms. Use the procedures developed in this chapter to determine the industry output.
i. Divide the duopoly quantity by the competitive quantity to determine the proportion of competitive output that a duopoly provides. Present your answer in reduced fractional form.
ii. Determine the price, and draw a dot on the demand curve indicating the duopoly's price and quantity.
d. Hypothesize as to the fraction of competitive output that would be sold if the boccie ball industry had three identical Cournot competitors. Then check your answer.
e. In general, what fraction of the competitive output level will be brought to market if there are N identical firms in the industry?
f. What happens to the quantity sold as more competitors are added to the industry? The price? What happens to consumer surplus and deadweight loss? Does this provide support for the government's desire to ensure competitive industries rather than monopolies or small oligopolies?