Week 2

Question 1

What is the equation for deadweight loss?

Answer 1

DWL = CSmax - (TTm + CSm)

Question 2

What is the cost of monopoly power to consumers?

Answer 2

CSmax - CSm

Question 3

What are the possible policy interventions for monopolies?

Answer 3

-If a monopoly is because of anti-competitive behaviour, competition authorities can issue fines, and criminal sentences and break up monopolies
-If it is a natural monopoly, it may be efficient but there is a need to regulate its prices…
-If it is due to unrivalled productivity, it is not clear what the response should be

Question 4

What is the best response for a firm in a 2-firm model?

Answer 4

qR = (a-q2-c)/2

Question 5

What is the best response for a firm in a model with n firms?

Answer 5

qR = (a-c-Q(-1))/2

Question 6

What is the Nash Equilibrium (Cournot) for an industry with 2 firms?

Answer 6

qcou = (a-c)/3

Question 7

What is the Nash Equilibrium (Cournot) for an industry with n firms?

Answer 7

qcou = (a-c)/(n+1)

Question 8

How do we solve the equilibrium quantity for firm 1 in a 2-firm model (not symmetric)?

Answer 8

1) Maximise profit for firm 1 (via differentiation)
2) Do the same for firm 2
3) Substitute the equations to find the equilibrium output

Question 9

How do we solve the Cournot model for 2 firms?

Answer 9

Find the best response (quantity) by differentiating the profit and solving… q1=q2=qc for the Cournot model, allowing you to find the quantity level
For an asymmetric model (different costs), we maximise the profit function and find qr as before and plug in one to the other to find the quantities for each firm

Question 10

How do we solve the Cournot model for n firms?

Answer 10

Solve the same as two firms, however, we have (n-1)qcou and qcou = (a-c)/(n+1)