ECON 4013 University of Toronto Find the Price and Profit of The Incumbent Questions

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ECON 4013 Industrial Organization
Semester 2, 2021-2022
1. (30 marks) Consider a market for a homogeneous product with demand given by ?? =
37.5 ? 0.25??. There are two firms, each with constant marginal cost equal to 40.
There is no fixed cost.
a. (8 marks) Determine output and price under a Cournot equilibrium.
b. (8 marks) Determine output and price under a Cournot equilibrium.
c. (4 marks) Determine output and price under a Bertrand equilibrium.
d. (10 marks) Compute the efficiency loss (a) and (b). Which mode of competition is
more efficient? Which one is the least?
2. (20 marks) Suppose that industry demand curve is given by P = 100 ? Q . The
incumbent’s total cost function is given by TC?? = 30q ?? and a potential entrant faces a
total cost function TC?? = 40q ?? .
a. (5 marks) What is the limit price in this market? If the monopolist charged the
limit price, what would its profit equal?
b. (9 marks) Suppose that the potential entrant has a capacity of q ?? = 10. It will
commit to produce at full capacity if it enters. If the incumbent accommodates the
entrant, what is the residual demand facing the incumbent? Use the residual
demand to find the price and profit of the incumbent.
c. (6 marks) Do you think that the potential entrant would enter the market? Why?

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demand curve

price

supply curve

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