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566 CHAPTER 13 MARKET STRUCTURE AND COMPETITION
b) Suppose Firms 1 and 2 merge, but their marginal cost v) All of the above are possible.
remains at 5. What are the new Cournot equilibrium quan- b) Suppose that it is observed that from one month to
tities and price? Is the profit of the merged firm bigger or the next, Firm 1’s quantity goes down, Firm 2’s quantity
smaller than the combined profits of Firms 1 and 2 in the goes down, and the market price goes down. A change in
initial equilibrium in part (a)? Provide an explanation for the demand and/or cost conditions consistent with what
the effect of the merger on profit in this market. we observe is:

13.11. An industry is known to face market price elas- i) The market demand curve shifted leftward in a paral-
ticity of demand Q, P 3. (Assume this elasticity as lel fashion.
constant as the industry moves along its demand curve.) ii) The market demand curve shifted rightward in a par-
The marginal cost of each firm in this industry is $10 per allel fashion.
unit, and there are five firms in the industry. What would iii) Firm 1’s marginal cost went up, while Firm 2’s mar-
the Lerner Index be at the Cournot equilibrium in this ginal cost stayed the same.
industry? iv) Firm 2’s marginal cost went down, while Firm 1’s
13.12. Besanko, Inc., is one of two Cournot dupolists in marginal cost stayed the same.
the market for gizmos. It and its main competitor v) All of the above are possible.
Schmedders Ltd. face a downward-sloping market c) Suppose that it is observed that from one month to
demand curve. Each firm has an identical marginal cost the next, Firm 1’s quantity goes up, Firm 2’s quantity
that is independent of output. Please indicate how the fol- goes up, and the market price goes up. A change in the
lowing will affect Besanko’s and Schmedders’s reaction demand and/or cost conditions consistent with what we
functions, and the Cournot equilibrium quantities pro- observe is:
duced by Besanko and Schmedders.
i) The market demand curve shifted leftward in a paral-
a) Leading safety experts begin to recommend that all lel fashion.
home owners should replace their smoke detectors with ii) The market demand curve shifted rightward in a par-
gizmos.
allel fashion.
b) Besanko and Schmedders’s gizmos are made out of iii) Both firms’ marginal costs went up by the same
platinum, with each gizmo requiring 1 kg of platinum. amount.
The price of platinum goes up.
c) Besanko, Inc.’s total fixed cost increases. iv) Both firms’ marginal costs went down by the same
amount.
d) The government imposes an excise tax on gizmos v) All of the above are possible.
produced by Schmedders, but not on those produced by
Besanko. d) Suppose that it is observed that from one month to the
next, Firm 1’s quantity goes up, Firm 2’s quantity goes
13.13. Suppose that firms in a two-firm industry choose up, and the market price goes down. A change in the
quantities every month, and each month the firms sell at demand and/or cost conditions consistent with what we
the market-clearing price determined by the quantities observe is:
they choose. Each firm has a constant marginal cost, and i) The market demand curve shifted leftward in a paral-
the market demand curve is linear of the form P a lel fashion.
bQ, where Q is total industry quantity and P is the market
price. Suppose that initially each firm has the same con- ii) The market demand curve shifted rightward in a par-
stant marginal cost. Further suppose that each month the allel fashion.
firms attain the Cournot equilibrium in quantities. iii) Both firms’ marginal costs went up by the same
amount.
a) Suppose that it is observed that from one month to the
next Firm 1’s quantity goes down, Firm 2’s quantity goes iv) Both firms’ marginal costs went down by the same
up, and the market price goes up. A change in the demand amount.
and/or cost conditions consistent with what we observe is: v) All of the above are possible.
i) The market demand curve shifted leftward in a parallel 13.14. An industry consists of two Cournot firms selling
fashion. a homogeneous product with a market demand curve
ii) The market demand curve shifted rightward in a paral- given by P 100 Q 1 Q 2 . Each firm has a marginal
lel fashion. cost of $10 per unit.
iii) Firm 1’s marginal cost went up, while Firm 2’s mar- a) Find the Cournot equilibrium quantities and price.
ginal cost stayed the same. b) Find the quantities and price that would prevail if the
iv) Firm 2’s marginal cost went up, while Firm 1’s mar- firms acted “as if” they were a monopolist (i.e., find the
ginal cost stayed the same. collusive outcome).