Let market demand in the trinkets industry be given by Q(P) = 55−P. There are only two firms in the industry, and the total cost function for each firm be given by C(qi) = 10 + 25q, where i = 1, 2.
1. Find each firm’s Cournot-Nash equilibrium output, profit, and the resulting equilibrium price in the market.
2. What is consumer surplus in equilibrium? How does it compare with consumer surplus under perfect competition?
3. Calculate the total surplus in this Cournot-Nash equilibrium. Is the equilibrium outcome Pareto efficient? If not, calculate the Dead-Weight-Loss (DWL) in this market.
4.Suppose that, observing profits made by incumbent firms, 6 new firms, identical to the first two, enter the market as Cournot competitors. How do equilibrium prices, quantities, and profits change? (Note: now there are 8 identical firms competing in the market for trinkets).
5. Are consumers better off? In other words, does their consumer surplus rise, fall, or stay the same? Explain your answer.
6. A ninth and identical firm is thinking about entering the market too. Explain why it will, upon further reflection, decide not to do so.