Two firms compete in selling identical widgets. They choose their output levels Q1 and Q2 simultaneously and
Question:
P 30 Q
where Q Q1 Q2. Until recently, both firms had zero marginal costs. Recent environmental regulations have increased Firm 2’s marginal cost to $15. Firm 1’s marginal cost remains constant at zero. True or false: As a result, the market price will rise to the monopoly level.
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Surprisingly this is true However it occurs only because the marginal cost for Firm 2 is 15 or more ...View the full answer
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