Question

(Market structure and entry) Consider an industry with market demand Q = a - p and an infinite number of potential entrants with access to the same technology. Initially, technology is given by C = F +cq. A new technology allows for a lower marginal cost, d < c, at the expense of a higher fixed cost, F' > F. (a) What can you say about the effect of the new technology on equilibrium price? (b) Suppose that a = 10, F = 2, F' = 3,0 = 2, d = 1. Determine equilibrium price under each of the two technologies.

Answer 1

Consider, market demand a=a-p i þ- a- e are enfinite no. of buyers competition Total cost = F + cq New cost = f't c'q do we have pechect with f> F ccc In Equilibrium, MR = MC TR = PxQ - (a-Q).Q = ao - Q² MR = a- 20 = c = MC a-C=20 10= A-C 2 Paa- (a-c) = 29-a

with the introduction of new technology, MR = en a-2a MC = c' a-20 =( is p'= a - (92€) :: with the new hechnology, equiliboom price will be lower and equilibrium quantity will be higher than before (b) a=10, F= 2,6=2 , F = 3, C'=) P = ate = 10+2 = 12 46 p' - atd - JOH = $5.526 2 2 TC = F + cq a = a-c = 10-2 = 8 4 units a' = a-c' = 104 = 2 = 4.5 units TC = 2 + 2(4) = 10 TC - 3+1(4.5) = 7.5 <10 (lower) a