Consider a market for a homogeneous product with demand given by Q=37.5-p/4.
a. Suppose that marginal cost for the market equal to 40. Determine the prevailing price, quantity and social welfare (consumer surplus) under perfect competition (efficient production).
b. Draw a graph showing the equilibrium in a.1. Show the equilbrium price and quantity, and the consumer surplus.
c. Determine the prevailing price, quantity and social welfare (as the sum of monopoly's profits plus consumer surplus) under monopoly assuming that the marginal cost for the monopolist is equal to 40.
d. Draw a graph showing the equilibrium in b.1. Show equilbrium price and quantity, and the deadweight loss of the monopoly.
e. Now suppose there are two firms, each with constant marginal cost equal to 40. Determine the equilibrium price and quantities produced by each firm under Cournot equilibrium (oligopoly). Determine the social welfare (sum of the profits of each firm plus consumer surplus).
f. Draw two graphs showing the Cournot equilibrim: i) using market demand demand, residual demand and marginal cost of one of the firms; ii) using best-response functions of the firms.
g. Compute the Cournot duopoly efficiency loss as a percentage of the efficiency loss under monopoly (Hint: using competition as a benchmark, use the welfare measures you computed before).