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( poms) Question 3 Consider the market for the homogenous good "space dust" with the following inverse demand function: p(y) = 12 – y where y is total sold quantity of the good on the market and p(y) is the price for which it sells. Due to Imperial regulations and restrictions there are only two firms on this market, “Lando inc" and "Jabba enterprises”, who both produce this homogenous good. Lando's cost function is cz(yd) = 2yz and Jabba's cost function is c;(y)) = 2y. The two firms set their production quantities simultaneously without knowing the choice of their opponent, but both firms know the inverse demand function and each other's cost function. a) Derive both firms' best response functions and draw these in a diagram. (10 points) b) What quantities will each firm produce in the equilibrium? Illustrate these quantities in the diagram from a). What is the total quantity produced and what is the equilibrium price? (8 points) The same two firms are also active in another market, the market for intergalactic "internet access" (this is also a completely homogenous good). This market is characterized by price competition, that is, either firm can supply the entire market demand if called upon to do so. The market demand function for internet access is z(p) = 12 – p where z is total sold quantity of internet access and p is the market price of internet access. Customers will buy from the firm with the cheapest internet access. Should the firms offer the same price, they will then share the market equally. Lando's cost function is cz (ZL) = 2zz and Jabba's cost function is c(z) = 2z. c) What quantities of internet access will the firms produce in equilibrium? What is total quantity sold and what is the equilibrium price? Explain any possible differences between the "space dust” and the “intergalactic internet access” markets. (7 points)

Answer 1

Answer: 3

Answey Here we have used the concepts oelated the Monopoly and digopoly Market structures with the increase in the number of firms, profit perfism decreases, price decreases and total quantity produced inggleases, the tulansition form a Monopolist ito an oligopolistic film of Sam coise Beestoine has been witnessed here, when another from with some cast structure, producing ame kind of good, enters in Marker fange a homogeneous goed Ctabbit beet) Inverse Demand funderly) = 22-24. rw = price of solving the ply) = 22 - 2y; y = Total quantity sold of the bees in literes, x Ply) = price of Beer somuåse beeline is the only figlors solving the market figm's cost function is e(Y) = 4y

DY © Tatal Revenue ob Samuotse beeline is TR =P OYJ = 822 - 289}= 22Y - 272 i profit , It is given by T - Tatal Revenue - Total cost = π = 22Y - 242 - 4y Now according to flest all des condition: o & 22-47-420 10 - 4y= 03= 405 Y = 4.5 litres is ply) -22 -27= 22-9213 =) Ply) = 13 units Calternative ways sine samwise beer.inc. is the only fium in the market, i ads as a Monopolisl. In Monopolistnyor profit maximisation , we have Marginal Revenue (IR) = Marginal cost-(MC)

Lys 22 -484 x = 4.5 " Y = 4.5 litres will be the quantity of beer sold: The market - P(y) =18 units will be the market price the praming pony is a new from that- entoys the market, with the same cast storudure and produces the same quantity of beer. - Now , Y=%14Y21 behere ys Total quantity of beer pyoduced. X = quantity produced by Samwise beet- inc (firme) further, i and T, 'alte the profit function of from, cing Biem z gespectively.

Tg = P(y)Y, - YY, >> Ti =(22-27, -272) Y1 - 470 d'Acatling ito Frooc. - 22-471-242-420 3) 18 - 471 -2y2 = 0 => Y, = 18 - 272. =R, 19.) - Bilya) is the best-vjesponse function of fimm 1 l in terting op e similarly for folm 2% Tz: p(xyz - 4Y2 T2= (22-24, -2%23% -4% Accoulding to fio.c; T2 = 22 - 4% 27,- 4-0 =)/2 = 18-24 1 = R₂ (1) - 392

Ra. () is the best response function of frisyne (inbeyms y yu) LRL%and Ky () aye The best blesponse functions of film i and from a yjespectively Rille) 104as3k A6%) rz(11) (4-5,0 19:0) y _ Response functions of from land frm2' In the above figure'Rick and Rz(y) are the besponse functions of film land 2 oyespectively. R, Cys) and R2C%) are also know as the geaction curves Caft pito, and fiston)

4 Pulling the value of Ye fejom ☺ in D, we gets- Y, - 18-24%) = 36- 18 +241 - y = 10th = 9+1 - - 341 - 9 al = 3. => Y = 3 lidhjes - © putting the value of y, from 6 in @ we get Yo = toy a Yz (::%, 3)=3 Yz 23 Wres. " Total quantity produced will be Iz Y, +Ý,'=3+3 = 6 litres Y=6 litres.