What Are The Economically Efficient (in Other Words, Perfect

What are the economically efficient (in other words, perfectly competitive) price and quantity of bottled wine and how much will be the profit?

Given the market demand function P = 602 - 2Q and the costs involved, we can analyze the scenario step-by-step. First, we determine the profit-maximizing output in a perfectly competitive market where firms are price takers. The marginal cost (MC) is $2, and fixed costs are zero, which simplifies marginal revenue (MR) to the same as price in perfect competition.

In perfect competition, the equilibrium occurs where P = MC. Set P = 2:

602 - 2Q = 2

Solving for Q:

602 - 2Q = 2

602 - 2 = 2Q

600 = 2Q

Q* = 300 units

Plug Q* back into the demand function to find the equilibrium price:

P* = 602 - 2(300) = 602 - 600 = $2

Thus, the perfectly competitive equilibrium quantity is 300 units, at a price of $2 per unit.

Profit per firm in perfect competition is zero in the long run because price equals marginal cost, and fixed costs are zero. However, in total, the market revenue is:

Total Revenue = P × Q = 2 × 300 = $600

The total cost is marginal cost times quantity plus fixed costs: 2 × 300 + 0 = $600, so profit is:

Profit = Total Revenue - Total Cost = $600 - $600 = $0

Summary

• Economically efficient quantity: 300 units
• Price at equilibrium: $2
• Total profit: $0

How much bottled wine will each one of them produce? At what price? How much profit will each one of them earn?

Now, considering the Cournot duopoly scenario where Amy and Soma choose quantities simultaneously, each firm maximizes its own profit given the other's quantity. Let q_A and q_S represent Amy's and Soma's quantities respectively. Total quantity Q = q_A + q_S. The market demand remains P = 602 - 2Q.

The profit for each firm is:

π_i = (P - MC) × q_i = (602 - 2(q_A + q_S) - 2) q_i = (600 - 2(q_A + q_S)) q_i

Each firm chooses q_i to maximize its profit, taking the other firm's quantity as given. The best response function for each firm can be derived:

Maximize π_i with respect to q_i:

∂π_i/∂q_i = 600 - 2(q_A + q_S) - 2q_i = 0

Since both firms are symmetric, the best response of each provides symmetry, resulting in q_A = q_S = q*

Substitute q_S = q_A = q* into the first-order condition:

600 - 2(2q) - 2q = 0

600 - 4q - 2q = 0

600 - 6q* = 0

q* = 100 units per firm

Thus, each firm produces 100 units, for a total quantity of Q = 200 units. The market price is:

P = 602 - 2(200) = 602 - 400 = $202

Profit per firm:

π_i = (202 - 2) × 100 = 200 × 100 = $20,000

This indicates that in the Cournot duopoly, each firm produces 100 units, at a market price of $202, earning a profit of $20,000 each.

What level of output will each one of them produce? What will be the price? How much will be the profit for each one of them?

In the Stackelberg model scenario, Soma is naive and follows Amy’s lead as the Stackelberg leader. Amy chooses her quantity first, anticipating Soma’s response. Soma then reacts optimally to Amy’s output, and Amy maximizes her profit considering Soma’s best response.

Let q_A be Amy’s quantity, and q_S Soma’s quantity, with Soma reacting as a function of Amy's choice:

Q = q_A + q_S

Soma’s best response function, given Amy’s choice, is found by maximizing Soma’s profit:

π_S = (602 - 2Q - 2) q_S

Maximize π_S with respect to q_S:

∂π_S/∂q_S = 602 - 2(q_A + q_S) - 2 - 2q_S = 0

Simplify:

600 - 2q_A - 4q_S = 0

Rearranged:

4q_S = 600 - 2q_A

Thus, Soma’s best response function:

q_S = (600 - 2q_A) / 4 = 150 - 0.5q_A

Amy, as leader, will choose q_A to maximize her profit, knowing Soma’s response. Her profit function:

π_A = (602 - 2(q_A + q_S)) q_A

Substitute Soma’s best response:

π_A = (602 - 2(q_A + 150 - 0.5q_A)) q_A

= (602 - 2(150 + q_A - 0.5q_A)) q_A

= (602 - 300 - 2q_A + q_A) q_A

= (302 - q_A) q_A

This quadratic function is maximized when:

Derivative with respect to q_A:

dπ_A/dq_A = 302 - 2q_A = 0

q_A = 151 units

Substitute q_A into Soma’s response function:

q_S = 150 - 0.5×151 = 150 - 75.5 = 74.5 units

Market price at this equilibrium:

Q = 151 + 74.5 ≈ 225.5 units

P = 602 - 2(225.5) ≈ 602 - 451 = $151

Profits:

For Amy:

π_A = (151 - 2) × 151 ≈ 149 × 151 ≈ $22,499

For Soma:

π_S = (151 - 2) × 74.5 ≈ 149 × 74.5 ≈ $11,100.5

Thus, Amy (leader) produces approximately 151 units, Soma responds with about 74.5 units, the market price is approximately $151, and the profits are roughly $22,499 for Amy and $11,100.50 for Soma.

References

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