4. (12 MARKS-6 FOR EACH PART) Two firms produce homogeneous products and compete as Cournot duopolists....

 

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4. (12 MARKS-6 FOR EACH PART) Two firms produce homogeneous products and compete as Cournot duopolists. Inverse market demand is given by P=30-Q. Firm 1 has a marginal cost of 5 per unit. Firm 2's marginal cost is c2<5. (a) Suppose that c2 falls. What will happen to the Cournot equilibrium (i) price, (ii) consumer surplus and total surplus, and (iii) the HHI? Explain your answer. (b) How does this example relate to criticisms of the use of market structure to identify market power? Explain. NOTE: To answer this question you may make use of the fact that under a Cournot duopoly, if inverse demand is given by P = A - BQ and Firms 1 and 2 have constant marginal costs ci and c2, the Cournot equilibrium quantities are: qi = (A-2C₁+C₂) 3B and 9₂ = (A-2c₂+C₁) 38 4. (12 MARKS-6 FOR EACH PART) Two firms produce homogeneous products and compete as Cournot duopolists. Inverse market demand is given by P=30-Q. Firm 1 has a marginal cost of 5 per unit. Firm 2's marginal cost is c2<5. (a) Suppose that c2 falls. What will happen to the Cournot equilibrium (i) price, (ii) consumer surplus and total surplus, and (iii) the HHI? Explain your answer. (b) How does this example relate to criticisms of the use of market structure to identify market power? Explain. NOTE: To answer this question you may make use of the fact that under a Cournot duopoly, if inverse demand is given by P = A - BQ and Firms 1 and 2 have constant marginal costs ci and c2, the Cournot equilibrium quantities are: qi = (A-2C₁+C₂) 3B and 9₂ = (A-2c₂+C₁) 38

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