Consider Two Identical Firms (No

question 99

Essay

Consider two identical firms (no. 1 and no. 2) that face a linear market demand curve. Each firm has a marginal cost of zero and the two firms together face demand:
P = 50 - 0.5Q, where Q = Q₁ + Q₂.
a. Find the Cournot equilibrium Q and P for each firm.
b. Find the equilibrium Q and P for each firm assuming that the firms collude and share the profit equally.
c. Contrast the efficiencies of the markets in (a) and (b) above.

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Definitions:

Inflation

The rate at which the general level of prices for goods and services rises, eroding purchasing power.

Semi-Annual Coupon

A bond or fixed-income security that pays interest to its holder twice a year.

Yield To Maturity

The total return expected on a bond if held until the end of its lifetime.