Suppose the demand for pizza in a small isolated town is p = 10 - Q. There are only two firms, A and B, and each has a cost function TC = 2 + Q. Compare the firms' profits if they behave as Cournot duopolists with their profits if they form a cartel and share the market
What will be an ideal response?
First, the Cournot equilibrium. Firm A's profit is ? = [10 - (qA + qB)]qA - 2 - qA. Maximizing with respect to its own output yields qA = 4.5 - qB/2. Similarly, firm B's best response is qB = 4.5 - qA/2. The equilibrium occurs when both firms produce 3 units. Price is
10 - 3 - 3 = 4. Firm revenue is 12 and firm cost is 5. Profit is 7 for each firm. As a cartel, maximize joint profit by setting marginal revenue equal to their joint marginal cost, or
10 - 2Q = 1. Q = 4.5, so each firm produces 2.25 units. Price is 5.5. Firm revenue is 12.375; firm cost is 4.25. Each firm earns a profit of 8.125.
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Suppose that nominal GDP in year 1 is 200 and nominal GDP in year 2 is 242. Assume that inflation is ten percent per year. How fast did the economy grow between these two years?
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Along a straight-line demand curve:
A. both the slope and the price elasticity are constant. B. the slope is constant but the price elasticity is not. C. the slope is not constant, but the price elasticity is. D. neither the slope nor the price elasticity is constant.