Econ 301: Theory of the Firm Ananish Chaudhuri Spring 2001 Homework 3
Please follow instructions carefully. (1) Homeworks should be typed or handwritten NEATLY. Sloppy, untidy homework assignments would be penalized. (2) Please write only on one side of the sheet and not on both sides. (3) Please circle or highlight your answers so that they are clearly legible. (4) All homeworks would be due back before class on Tuesday, May 1, 2001. You can hand in the homework to me right before class. Or if you cannot make it to class then make sure you drop the homework off. You can leave it with one of the administrative assistants Wanda Walters (CIC 125A) or Karen Davis in the CIC building or put it in my mailbox. I will NOT accept late homework assignments. (5) Please DO NOT FORGET to write your name on your homework clearly.
In answering the questions and drawing please make sure that your writing is legible and the graphs are drawn neatly. It is VERY IMPORTANT that I can make out your writing or your drawing - sloppy, untidy homeworks will be penalized!
There is 1 problem which has three parts. Each part is worth 10 points for a total of 30 points.
Consider two firms which produce a homegeneous product and compete in the same market. The market demand function is P = 80 - Q. Each firm has a constant and identical marginal cost of production equal to $20. EAch firms decides what output to produce given the market demand and their marginal cost. PART 1: Suppose these two firms operate as Cournot duopolists and decide on their output SIMULTANEOUSLY. What output should each firm produce? What is the corresponding market price? What profit does each firm make? PART 2: Now suppose Firm 1 moves first and decides its output first. Firm 2 observes Firm 1's output and decides on its output next. What output would the two firms produce in this case? What is the market price? What profit does each firm make? PART 3: Finally the two firms can collude and form a cartel. What output should the cartel produce? Assuming that the cartel output is divided equally between the two component firms, what output should each firm produce? What is the market price? What profit does each firm make?