Question

Consider an industry with three firms each having marginal costs equal to zero. The

inverse demand curve facing ts industry is:

P(q1,q2,q3) = 60 - (q1+q2+q3)

(a) If each firm behaves as a cournot competitor, what is firm 1’s best response

function?

(b) Calculate cournot equilibrium of ts problem.

(c) Firms 2 and 3 decide to merge and form a single firm (MC is still zero). Calculate

the new industry equilibrium and comment on combined profits from firms 2 and

3 considering pre and post merger profits.

Answer 1

firms 2 and 3 decide to merge and form a single firm.industry to developing his industry in a correct way