industrial organization

Assignment 1 Econ 6520: Industrial Organization

Due Thursday, 21 April, 6:00 pm. Submit in class in hardcopy. Students are welcome to discuss homework in groups, but each student must prepare and submit a unique assignment and note the names of other group members. All assignments must be neat and professional. Answer all parts of all questions.

1. Consider a market with demand given by Q = 400 p2

. To enter the market a firm must first pay an entry cost of κ, thereafter it can produce at a constant marginal cost of 2 with no other fixed costs.

(a) If a government grants a firm an exclusive monopoly in this market, how low must κ be for the declared monopolist to enter the market?

(b) If instead there are a two potential entrants who will engage in symmetric Cournot competi- tion if they both enter, how low must κ be for them both to enter the market?

2. Consider a market with demand given by Q = 1 b · (a − p), where a > 0 and b > 0. Suppose the

only supplier in the market has costs given by TC(q) = mq + F , where F > 0 and m is positive but small enough that the firm does not shutdown. Find the monopolist’s profit-maximizing price and quantity, the price elasticity of demand at that quantity, the monopolist’s maximum profits.