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Danang Desta Yudha

1406511811
Microeconomics Theory 2
Assignment#3
15.1.Demand curve for monopolist

Q=150P

that has no costs of

production.
a. Profit-maximizing
price-quantity
combination
for
monopolist and the profit will be:
From the demand function above, we can conclude that:
Cost,

C ( Q )=0

Demand function,
Revenue,

Q=150P P=150Q

R ( Q )=P ( Q ) Q=( 150Q ) Q=150 QQ2

Marginal Revenue,
Profit,

this

MR=

dR(Q)
=1502 Q
dQ

=R ( Q )C (Q )=150 QQ 20=150 QQ 2

To maximize profit, we must set


FONC,

d
=0
dQ

and

SOSC,

d2
<0
d Q2

The FONC will be:


2
d d ( 150 QQ )
=
=1502 Q=0
dQ
dQ

thus,

Q=75

and

P=15075=75

The SOSC will be:

d 2 d (1502 Q)
=
=2
dQ
d Q2
Since SOSC
price,

d2
=2<0
d Q2

(hold)

is satisfied, then, quantity,

Q =75

and

P =75 do maximize the profit.

The profit will be:


Profit,

2
=R ( Q )C (Q )=150 (75 )75 =5625

b. There are two firms in the market facing the demand and cost
conditions just described for their identical products. Firms
choose quantities simultaneously as in the Cournot model. The
output in the nash equilibrium, market output, price and firm
profits will be:
Cournot Model:
Market output,

Q=q 1 +q2

Market price,

P=150Q=150q1 q2

Firm 1
Profit,

1=T R1T C1=P q 10=( 150q1q2 ) q1=150 q 1q 21q 1 q 2


d 1

Maximizing profit, FONC, d q1 =0

d 1
=1502 q 1q 2=0
d q1

thus,

1
q1 =75 q 2 .... (1)
2

Firm 2
Profit,

2=T R2T C2 =P q 20=( 150q1q2 ) q2 =150 q2q1 q2q22


d 2

Maximizing profit, FONC, d q2 =0

d 2
=150q12 q 2=0
d q2

thus,

1
q 2=75 q 1 .... (2)
2

Substitute equation (1) into (2),

q 2=75

1
1
75 q
75 q 2 =75 + 2
2
2
2 4

3 q 2 150
=
4
4
Then,

thus,

q 2=50

1
q1 =75 ( 50 )=50
2

The Nash equilibrium quantities for Cournot:


Output firm 1,

q1c =50

Output firm 2,

q c2=50

Output market,
Market Price,

Q=q c1 +q2c =50+50=100


P=150q1c qc2=1505050=50
c

Profit firm 1,

1=T R1T C1=P q 10=50 (50 )=2500

Profit firm 2,

2=T R2T C2 =P q c20=50 ( 50 )=2500

c. Two firms choose prices simultaneously as in the Bertrand


model. Prices in the Nash equilibrium, firm output and profit
and market output will be:

Bertrand model:
Assumption of market price,

P=MC=0

P=150Q=0 Q=150
The Nash equilibrium quantities for Bertrand:
Market output,

q1b=q b2=

Firm's Output,
Firm's Profit,

Q =150
Q 150
=
=75
2
2
b

1= 2=TRTC=P q 10=0 ( 75 )0=0

Industry Profit,

= 1 + 2=0

d. Demand curve for parts (a) - (c) where the market pricequantity combination appear as follow:

15.2.

Firm's

marginal and average costs are constant and equal to


that inverse market demand is given by

and

P=abQ , where a, b >

0
a. Profit-maximizing price-quantity combination for a monopolist
and monopolist's profit will be:
From the demand function above, we can conclude that:
Marginal

Cost,

MC=c ;

Average

C=ACxQ=cQ
Revenue,
Profit,

R=PQ=( abQ ) Q=aQb Q2

=R ( Q )C (Q )=aQb Q 2cQ

To maximize profit, we must set


FONC,

d
=0
dQ

The FONC will be:

and

SOSC,

d
<0
d Q2

Cost,

AC=c ;

Cost,

2
d d ( aQ b Q cQ )
=
=a2 bQc=0
dQ
dQ

thus,

Q=

ac
2

and

P=ab

2aa+ c a+ c
=
=
( ac
)
2b
2
2

The SOSC will be:

d 2 d (a2 bQc )
=
=2 b
dQ
d Q2
d2
=2b <0
d Q2

Since SOSC

and price,

(hold)

P=

a+ c
2

is satisfied, then, quantity,

Q=

ac
2

do maximize the profit.

The profit will be:


Profit,

=R ( Q )C (Q )=PQcQ=

][ ] [

a+c
ac
a+c2c
c
=
2
2b
2

2
ac ( ac )
=
2b
4b

][ ]

b. The Nash equilibrium quantities for Cournot duopolists,


market output, market price and firm and industry profits will
be:
Cournot Model:
Market output,
Market price,

Q=q 1 +q2

P=abQ =ab q1b q2

Firm 1
Profit,

1=P q1c q 1=( ab q 1b q 2 ) q1c q1 =a q1 b q21 b q1 q 2c q1


d 1

Maximizing profit, FONC, d q1 =0

d 1
=a2b q1b q2c=0
d q1

thus,

2 b q1 +b q 2=ac

Best respond reaction function firm 1,

q1 =

.... (1)

ac b q2
2b

Firm 2
Profit,

2=P q2c q 2=( ab q 1b q 2 ) q2c q 2=a q 2b q 1 q 2bq 22c q2

d 2
Maximizing profit, FONC, d q2 =0

d 2
=ab q1 2b q2c=0
d q2

b q 1+2 b q 2=ac

thus,

q 2=

Best respond reaction function firm 2,

.... (2)

ac b q1
2b

Eliminate equation (1) into (2),

2 b q1 +b q 2=ac

x1

2 b q1 +b q 2=ac

b q 1+2 b q 2=ac

x2

2 b q1 +4 b q2 =2 a2 c
3 b q2=( ac)
q 2=

Then,

ac b
q1 =

(ac)
3b

( (ac)
3 b ) 3 a3 c ac ac
=
=

2b

6b

3b

The Nash equilibrium quantities for Cournot:


Output firm 1,

q1c =

(ac)
3b

Output firm 2,

q c2=

ac
3b

Q=q c1 +q2c =

Output market,
Market Price,

ac ac 2(ac)
+
=
3b
3b
3b

P=abQ =ab

2(ac) 3 a2 a+2 c a+2 c


=
=
3b
3
3

Profit firm 1,

1=P qc1c q c1=( Pc)q c1=

][ ] [

a+2 c
ac
a+2 c3 c
c
=
3
3b
3

2
ac ( ac )
=
3b
9b

][ ]

Profit firm 2,

2=P qc2c q c2=( Pc ) q c2=

2
a+2 c
ac
a+2 c3 c ac ( ac )
c
=
=
3
3b
3
3b
9b

][ ] [

][ ]

Industry Profit,

( ac )2 ( ac )2 2 ( ac )2
= 1 + 2=
+
=
9b
9b
9b
c. The Nash equilibrium prices for Bertrand duopolists, firm and
market output, and firm and industry profits will be:

Bertrand

P=MC=0

Assumption of market price,

P=abQ=c
bQ=ac

Q=

thus,

ac
b

The Nash equilibrium quantities for Bertrand:


Market output,

Q b=

ca
b

ac
Q
b
ac
q1b=q b2= =
=
2
2
2b

Firm's Output,

Profit firm 1,

1=T R1T C1=P q c1c qc1=c

ac
c (
=0
( ac
)
2b
2b )

Profit firm 2,

2=T R2T C2 =P q c2c q2c =c

ac
c (
=0
( ac
)
2b
2b )

Industry Profit,

= 1 + 2=0

d. If there are n identical firms in a Cournot model then the Nash


equilibrium quantities, market output, market price, and firm
and industry profits as functions of n will be:

Q=n q i

Qi=n q iq i=( n1)qi


Market output,
Market price,

Q=Qi +q i
P=abQ =ab Qib q i

Profit,

i=R ( q i) C ( qi )=P q ic qi =( ab Qib q i ) qic q i=a q ib q i Qi b qi2c q i


d i

Maximizing profit, FONC, d qi =0

d 1
=ab Qi2 b qi c=0
d q1
ab(n1)q i2 b q ic=0
2 b qi +b (n1) qi=ac

b q i( 2+ n1)=ac
thus,

q1 =

ac
(n+1)b

The Nash equilibrium quantities for Cournot:


Output firm i,

qic =

Q =n q i =

Output market,

Market Price,

ac
(n+1)b

n ( ac )
(n+1) b

Pc =ab Qc =ab

n ( ac ) a ( n+1 ) n(ac ) a+nc


=
=
(n+ 1)b
(n+1)
(n+1)

Profit firm i,

i=P qci c q ci =(Pc )q ci =


i=

][

][
][ ]

][

a+nc(n+1)c
a+nc
ac
ac
c
=
( n+ 1)
(n+1) b
(n+1)
(n+1) b

a+nc (n+1)c
( ac )2
ac
ac
ac
=
=
(n+1)
( n+1) b
(n+1) (n+1)b (n+1)2 b

Industry Profit,

][

][

=n i=

n ( ac )2
(n+1)2 b

e. Outcome from (q) can be reproduced in part (d) by setting


n=1, the Cournot duopoly outcome from part (b) can be
reproduced in part (d) by setting n=2 in part (d), and that
letting n approach infinity yields the same market price,
output, and industry profit as in part (c) appears as follow:
The Nash equilibrium quantities for monopoly, n=1

q m=

Output monopolist,

P m=

Price monopolist,

i=

Profit monopolist,

ac
ac
=
(n+1)b 2b

a+nc a+ c
=
2
( n+1)

( ac )2 ( ac )2
=
4b
(n+1)2 b

The Nash equilibrium quantities for Cournot, n=2


c

Output firm,

q1 =q2 =

Qc =n q ci =

Output market,
c

Market Price,

ac
ac
=
(n+1)b 3 b

P=

2 ( ac )
3b

a+nc a+2 c
=
3
(n+1)

( ac )2 ( ac )2
Profit firm, 1= 2= (n+1)2 b = 9 b
2

Industry Profit,

15.3.

Let

ci

n ( ac ) 2 ( ac )
=
=
9b
( n+1)2 b

be the constant marginal and average cost for firm i

(so that firms may have different marginal costs). Demand is


given by

P=1Q

a. The Nash equilibrium quantities assuming there are two firms in a


Cournot market, market output, market price, firm profits, industry
profits, consumer surplus, and total welfare will be:
Cournot Model:

Q=q 1 +q2

Market output,
Marginal

Cost,

M C i=c i ;

Average

Cost,

A Ci=c i ;

C=ACqi=c i qi
Market price,

P=1Q=1q1q 2

Firm 1
Profit,

1=T R1T C1=P q 1c 1 q1=( 1q1 q2 ) q 1c 1 q1=q 1q 21q 1 q 2c 1 q1


d 1
Maximizing profit, FONC, d q1 =0
d 1
=12 q1 q2 c 1=0
d q1

thus,

q1 =

1c 1q 2
2

Best respond reaction function firm 1,

.... (1)

q1 =

1c 1q 2
2

Firm 2
Profit,

2=T R2T C2 =P q 2c 2 q2=( 1q 1q 2) q 2c 2 q2=q2q22q1 q2c2 q2


d 2

Maximizing profit, FONC, d q2 =0

d 2
=1q 12 q2 c 2=0
d q2

thus,

q 2=

1c 2q 1
.... (2)
2

Best respond reaction function firm 2,

q 2=

1c 2q 1
2

Cost,

Substitute equation (1) into (2),

q 2=

1c 2

1c 1q 2
22 c 21+c 1 +q 2
2
=
2
4

4 q2=12 c2 +c 1 +q 2
q 2=

12 c2 +c 1
3

and

1c 1
q1 =

12 c 2 +c 1
33 c 21+2 c 1c 1 24 c 2+2 c 1 12 c2 + c1
3
=
=
=
2
6
6
3

The Nash equilibrium quantities for Cournot:


Output firm 1,

q1c =

12 c2 +c 1
3

Output firm 2,

q c2=

12 c2 +c 1
3

Q=q c1 +q2c =

Output market,
Market Price,

12c 2 +c 1 12 c 2 +c 1 2c 1c 2
+
=
3
3
3

P=1Q=1

2c 1c 2 32+c 1 +c 2 1+ c1 +c 2
=
=
3
3
3

Profit firm 1,

1=P qc1c q c1=( Pc)q c1=

][

][

1+ c 1+ c 2
12 c 2 +c 1
c
3
3

][

][

1+ c 1+ c 23 c 1 12 c 2+ c 1
12 c2 +c 1 12 c2 +c 1 ( 12 c 2 +c 1 )
1=
=
=
3
3
3
3
9
Profit firm 2,

1=P qc1c q c1=( Pc)q c1=

][

][

1+ c 1+ c 2
12 c 2 +c 1
c
3
3

][

][

1+ c 1+ c 23 c 1 12 c 2+ c 1
12 c2 +c 1 12 c2 +c 1 ( 12 c 2 +c 1 )
1=
=
=
3
3
3
3
9
Industry Profit,

= 1 + 2=

( 12 c 2+ c 1)
9

( 12 c 2+ c 1 )
9

2
2
( 12 c 2+ c1 ) +( 12 c2 + c1 )

Consumer Surplus, CS

1+ c1 +c 2
1 2c 1c 2
1
2
3
3

(
)(
)
1 2c c 31c c
CS= (
)( 3 )
2
3
1 2c c 2c c
CS= (
)( 3 )
2
3
CS=

CS=

( 2c 1c 2 )

18

Total Welfare, W

W = + CS

W=

12 c2 +c 1 12 c2 +c 1 1 2c 1c 2 2c 1c 2
+
3
3
2
3
3

W=

12 c2 +c 1 1 2c 1c2
+
3
2
3

W=

2+2 c 1 +2 c 2+2c 1c 2
6

W=

][

] (

](

)(

)] ( 2c3c )
1

2c 1c 2
3

( 4+ c1 +c 2 ) ( 2c1 c 2 )
18

b. The reduction in firm 1's marginal cost shifts its best response out and
shifts the equilibrium from E to E'

Extra
Suppose

Question

P (Q )=aQ; Q=q1 +q 2 ; C ( q1 ) =c q1 . Find Bertrand, Cournot and

Collusive Equilibrium. Draw diagram.

a. The Bertrand Model: Follow Perfect Competitive equilibrium

P=MC=

dC (q i)
=c
d qi

P=aQ

c=aQ

Qb=ac

thus,

The Nash equilibrium quantities for Bertrand:


Market output,

Qb=ac
q1b=q b2=

Firm's Output,

Q ac ac
=
=
2
2
2

Profit firm 1,

1=T R1T C1=P q c1c qc1=c

( ac2 )c ( ac2 )=0

Profit firm 2,

2=T R2T C2 =P q c2c q2c =c

ac
c (
=0
( ac
)
2
2 )

Industry Profit,

= 1 + 2=0

b. Cournot Model:
Market price,

P=aQ=aq1q2

Firm 1
Profit,

1=P q1c q 1=( aq 1q 2) q 1c q1=a q1q21q1 q2c q 1

d 1
Maximizing profit, FONC, d q1 =0
d 1
=a2 q1q 2c=0
d q1

thus,

2 q1 +q 2=ac

Best respond reaction function firm 1,

.... (1)

q1 =

ac b q2
2

Firm 2
Profit,

2=P q2c q 2=( aq 1q 2) q 2c q2 =a q2 q1 q2 q2 c q 2

d 2
Maximizing profit, FONC, d q2 =0
d 2
=aq1 2q 2c =0
d q2

thus,

q1 +2 q 2=ac

Best respond reaction function firm 2,

.... (2)

q 2=

ac q1
2

Eliminate equation (1) into (2),

2 q1 +q 2=ac

x1

2 q1 +q 2=ac

q1 +2 q 2=ac

x2

2 q1 +4 q2=2a2 c
3 q 2=(ac )
q 2=

Then,

ac b
q1 =

(ac)
3

( (ac)
3 ) 3 a3 c ac ac
=
=

The Nash equilibrium quantities for Cournot:


c

Output firm 1,

q1 =

Output firm 2,

q 2=

ac
3
ac
3

Q=q c1 +q2c =

Output market,

P=aQ=a

Market Price,

ac ac 2(ac)
+
=
3
3
3
2(ac ) 3 a2 a+2 c a+2 c
=
=
3
3
3

Profit firm 1,

1=P qc1c q c1=( Pc)q c1=

][ ] [

a+2 c
ac
a+2 c3 c
c
=
3
3
3

][ ]

ac ( ac )
=
3
9

Profit firm 2,

a+2 c
ac
a+2 c3 c ac ( ac )
2=P q c q =( Pc ) q =
c
=
=
3
3
3
3
9
c
2

c
2

c
2

][ ] [

][ ]

Industry Profit,

( ac )2 ( ac )2 2 ( ac )2
= 1 + 2=
+
=
9
9
9
c. Collusive Model:
Market price,

P=aQ=aq1q2

= 1 + 2=P q1c q 1+ Pq 2c q2= ( Pc ) q1 +( Pc)q 2


=( aq1q 2c ) q 1+ ( aq1q2c ) q 2=a q 1q 212 q1 q2c q 1+ a q2q22c q 2

Max

=a q1q 12 q1 q 2c q1 +a q 2q 2c q2

FONC

d
=a2 q12q 2c=0
d q1
d
=a2 q12q 2c=0
d q2
d d
=
=a2 q 12 q2c=0
d q1 d q2
2 q1 +2 q2=ac
q1 +q 2=

thus,

ac
2

Q=

ac
2

The Nash equilibrium quantities for Cournot:

Q=

Output market,

ac
2

ac
Q
2
ac
q1 =q2 = =
=
2
2
4

Output firm ,

P=aQ =a

Market Price,

ac 2 aa+c a+c
=
=
2
2
2

Profit firm 1,

][ ] [

a+c
a+ c
a+c2 c
1=P q c q =(Pc) q =
c
=
2
4
2

][ ]

a+c ( ac )
=
4
8

Profit firm 2,

][ ] [

a+ c
a+ c
a+c2c
2=P q c q =( Pc )q =
c
=
2
4
2

Industry Profit,

= 1 + 2=

( ac )2 ( ac )2 ( ac )2
+
=
8
8
4

d. Diagram that shows all the model:

a+c ( ac )
=
4
8

][ ]