Purchase Solution

profit level associated with the Cournot quantity

Not what you're looking for?

Ask Custom Question

Suppose the market demand curve in an industry is characterized by P=1-Q, where P is the market price and Q is the total quantity supplied to the market. Suppose there are three firms in this industry. All have a zero marginal cost of production.

1. In a one-shot interaction, what is the Cournot quantity for each firm?
2. What is the profit level associated with the Cournot quantity for each firm?

Now consider an infinitely repeated version of the above game. Suppose that the firms agree to act collectively as a monopolist. All firms have the same discount factor .

3. How much will each individual firm produce under the cartel arrangement?
4. How much profit will each individual firm make under the cartel arrangement?
5. Suppose a firm decided to cheat on the cartel arrangement. How much would it produce i.e. what is the best possible deviation it could make? How much profit would it get from making this deviation?
6. How big does the discount factor have to be in order to support the cartel arrangement through the threat of playing Cournot forever as punishment for deviation?
7. Compare this with the two firm case. Is the delta that supports the two-firm case higher or lower than the three-firm case i.e. is it easier to support a cartel with two firms or with three firms? Explain.

Purchase this Solution
Solution Summary

The profit level associated with the Cournot quantity is determined.

Solution Preview

Please see the attached file.

Suppose the market demand curve in an industry is characterized by P=1-Q, where P is the market price and Q is the total quantity supplied to the market. Suppose there are three firms in this industry. All have a zero marginal cost of production.

1. In a one-shot interaction, what is the Cournot quantity for each firm?
2. What is the profit level associated with the Cournot quantity for each firm?

Now consider an infinitely repeated version of the above game. Suppose that the firms agree to act collectively as a monopolist. All firms have the same discount factor .

3. How much will each individual firm produce under the cartel arrangement?
4. How much profit will each individual firm make under the cartel arrangement?
5. Suppose a firm decided to cheat on the cartel arrangement. How much would it produce i.e. what is the best possible deviation it could make? How much profit would it get from making this deviation?
6. How big does the discount factor have to be in order to support the cartel arrangement through the threat of playing Cournot forever as punishment for deviation?
7. Compare this with the two firm case. Is the delta that supports the two-firm case higher or lower than the three-firm case i.e. is it easier to support a cartel with two firms or with three firms? Explain.

Question 1
Let's call Q1, Q2 and Q3 to the quantities produced by each of the firms. We get that the ...

Purchase this Solution
Free BrainMass Quizzes
Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

View More Free Quizzes
Related BrainMass Solutions

  • Cournot equilibrium outputs

    Find the Cournot equilibrium outputs for each firm. b.) Find the industry price that is associated with these output levels. c.) Find the profit level for each firm and for the industry. 2.)

  • Cournot and Bertrand Equilibrium

    Find the equilibrium quantity produced by each firm in the Cournot equilibrium. What is the equilibrium price and profits for each firm? b. What are the equilibrium price, combined output, and profits with Bertrand competition?

  • Cournot problem

    What is United's profit maximizing quantity of passengers? Suppose American carries 500 passengers per day. What is United's profit maximizing quantity of passengers? b) Derive the quantity reaction function for each firm.

  • Cournot Duopoly: Determining Equilibrium Price and Quantity

    Solution describes the steps to determine equilibrium price and quantity of two identical firms in the case of cournot duopoly.

  • Graphing Demand Curve and Finding Price Quantity

    a) Calculate the profit-maximizing price-quantity combination for this monopolist. Also calculate the monopolist's profit.

  • Cournot Oligopoly

    29839 Cournot Oligopoly Cournot Oligopoly . Two firms compete on the quantity they produce of good a single com¬modity.

  • Barriers of entry

    - 2Q a- Calculate the profit-maximizing price-quantity combination for the firm.

  • question on Bertrand and Cournot Equilibriums

    Third, the question avoids mentioning the level of information with the company. Fourth, the question does not give us the price margin/ output ratio of the company.

  • Cournot model of competition

    The duo firms involved try to decide the quantity of the goods to produce into the market with the assumption that the other company will not be affected by the decision.

View More Related Solutions