Questions:
1. Let demand for car batteries be such that Q = 10 2P. Assume constant marginal costs of 3. Compute the equilibrium price, quantity, consumer surplus, producer surplus for
(a) A perfectly competitive firm
(b) A monopoly
(c) Two firms engaged in Cournot Competition.
(d) Assume one of the two _rms has a marginal cost of 3. What is the oligopoly outcome in this case? [Hint you can't use the trick we used to get a second equation.]
(e) (Hard question) Suppose a discount factor of 0.99 and a duopoly structure on agreements. What is the Pareto frontier of agreements that may form the basis of a cartel?
2. Assume a linear market demand curve and a concave average cost curve for the following questions:
(a) Show how an incumbent can keep an entrant out of the market by threatening to produce a large quantity.
(b) Why might this behavior be irrational if an incumbent actually faces an entrant?
(c) Explain how the purchase of additional capacity (even if it is never used) can make the previous behavior rational. What is meant by
additional capacity in practice?