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Question 1 (20 points):
Mark and Aaron are two individuals who one day discover a stream that flows lime juice instead of water. Mark and Aaron decide to bottle the lime juice and sell it. The marginal cost of bottling lime juice and the fixed cost to bottle lime juice are both zero. The market demand for bottled lime juice is given as: P = 90 – 0.25Q where Q is the total quantity of bottled lime juice produced and P is the market price of Bottled lime juice.
1. What is the economically efficient price of Bottled lime juice?
2. What is the economically efficient quantity of Bottled lime juice produced?
3. If Mark and Aaron were to collude with one another and produce the profit-maximizing monopoly quantity of bottled lime juice, how much bottled lime juice will they produce?
4. Given the output level in (c), what price will Mark and Aaron charge for bottled lime juice?
5. At the output level in (c), what is the welfare loss?
6. Suppose that Mark and Aaron act as Cournot duopolists, what are the reaction functions for Mark and for Aaron?
7. In the long run, what level of output will Mark produce if Mark and Aaron act as Cournot duopolists?
8. In the long run, what will be the price of lime juice if Mark and Aaron act as Cournot duopolists?
9. Suppose that after Mark and Aaron have arrived at their long run equilibrium as Cournot duopolists, another individual, Patrick, discovers the streams. Patrick, who will sell no lime juice before its time, decides to bottle lime juices. There are now three Cournot firms producing at once. In the long run, what level of output will Mark produce
Question 2 (10 points): Suppose that the market demand for mountain spring water
is given as follows:
P = 1200 – Q
Mountain spring water can be produced at no cost.
1. What is the profit maximizing level of output and price of a monopolist?
2. What level of output would be produced by each firm in a Cournot duopoly in the
long run? What will the price be?
3. What will be the level of output and price in the long run if this industry were
4. Discuss and compare the results you found in 1, 2 and 3.
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