Econ questions

1. Assume a market with homogeneous goods and the following inverse demand function.

where p is price and Q is industry output. Note that the industry marginal revenue function is:

.

In this market, long-run average cost (AC) and long-run marginal cost (MC) are:

.

A. Assume a duopoly market. Determine each firm’s Nash equilibrium output (q1* and q2*) if firms compete in a Cournot game.

B. Assume a duopoly market. Determine each firm’s Nash equilibrium price (p1* and p2*) if firms compete in a Bertrand game.

C. Assume an oligopoly market with 2 firms. Determine each firm’s output if firms compete in a Cournot game.

D. Assume an oligopoly market with 2 firms. Determine each firm’s price if firms compete in a Bertrand game.

2. Regarding the economics of advertising:

A. Write down the Dorfman-Steiner (D-S) condition that describes a monopoly firm’s advertising to sales ratio (A/S).

B. For a monopoly market, use the D-S condition to explain how the price elasticity of demand (η) and the advertising elasticity of demand () will affect A/S, ceteris paribus.

C. For an oligopoly market, how will strategic effects influence each firm’s A/S?

D. List two conditions that are very likely to imply that the market level of advertising is excessive from society’s perspective.