List of exercises related to De Francesco’s module

1. There are a …xed number of n = 12 …rms in an industry producing

q2
a homogeneous product. The cost function is ci (qi ) = 2i for each …rm; the
market demand function is Q(p) = 26 p.
(a) Determine the competitive equilibrium for the given number of …rms.[[pCE =
2; QCE = 24; qiCE = 2 (each i = 1; ::; 12)]].
(b) Unlike in part (a), now let these …rms be playing a quantity game in
a Cournot fashion. Determine the Cournot equilibrium.[[pc = 3:714285; Qc =
22:2857; qic = 1:85714 (each i = 1; ::; 12)]].
(c) In your answer to part (b), how do you explain that the Cournot equi-
librium is necessarily symmetric (i.e., the fact that q1c = ::: = q12
c
?

2. Let the cost function be ci (qi ) = cqi2 (c > 0) for each …rm and let the
demand function be Q(p) = a p for any p a (a > 0).
Take the number of …rms n as an independent variable.
(a) Determine the competitive equilibrium as a function of the number of
2ac an a
…rms.[[pCE (n) = n+2c ; QCE (n) = n+2c ; qiCE (n) = n+2c ]].
(b) Determine the Cournot equilibrium as a function of the number of
a+2ac an a
…rms.[[pc (n) = 1+n+2c ; Qc (n) = 1+n+2c ; qic (n) = 1+n+2c ]]
c CE
(c) Show that, for any n, Q (n) < Q (n).
(d) Show that the Cournot equilibrium and the competitive equilibrium
approach to each other as n increases. [[For instance, one can easily see that
d Qc (n) Qc (n)
dn QCE (n) > 0 and that limn!1 QCE (n) = 1.]]
(e) Where do the competitive equilibrium and the Cournot equilibrium con-
verge as n ! 1? [[limn!1 QCE (n) = limn!1 Qc (n) = a, limn!1 qiCE (n) =
limn!1 qic (n) = 0, limn!1 pCE (n) = limn!1 pc (n) = 0.]]
3. An industry produces a homogeneous product. The demand function is
D(p) = 18 p, total capacity in the industry is …xed at K = 12, there are n
…rms (the level of n will be speci…ed below), each with the same capacity k
(such that, of course, nk = 12), and each …rm can produce any output qi k
with cost function ci (qi ) = 4qi and cannot produce more than k.
(a) Determine the competitive equilibrium and provide a graphical represen-
tation of it.[[pCE = 6, QCE = K = 12, qiCE = k.]]
(b) Now, suppose the …rms are price setters, each one choosing independently
and simultaneously the price of its own product.
(b.i) Let there be n = 4 …rms, each with capacity k = 3 (so, quite a con-
centrated industry). Check whether or not it is a Nash equilibrium of the price
game for all the …rms to charge the competitive price.[[It is not.]]
(b.ii) Let there be n = 12 …rms, each with capacity k = 1 (so, a much
less concentrated industry than in part (b.i)). Check whether or not it is a
Nash equilibrium of the price game for all the …rms to charge the competitive
price.[[Now it is.]]

4. An industry produces a homogeneous product. The demand function is

D(p) = 18 p, total capacity in the industry is …xed at K = 16, there are n

1
…rms (the level of n will be speci…ed below), each with the same capacity k
(such that, of course, nk = 16); each …rm can produce any output qi k with
cost function ci (qi ) = 4qi and cannot produce more than k.
(a) Determine the competitive equilibrium and provide a graphical represen-
tation of it.[[pCE = 4, QCE = 14, qiCE is not fully determinate (what matters
is that q1CE + :::qnCE = 14)]]
(b) Now, suppose the …rms are price setters, each one choosing independently
and simultaneously the price of its own product.
(b.i) Let there be n = 2 …rms, each with capacity k = 8 (so, a highly
concentrated industry). Check whether or not it is a Nash equilibrium of the
price game for all the …rms to charge the competitive price.[[It is not.]]
(b.ii) Let there be n = 10 …rms, each with capacity k = 1:6 (so, a much
less concentrated industry than in part (b.i)). Check whether or not it is a
Nash equilibrium of the price game for all the …rms to charge the competitive
price.[[Now it is.]]

5. There are two …rms in an industry producing a homogeneous product.

Each …rm has a long-run cost function ci (qi ) = 2qi + 64; the market demand
function is D(p) = 44 p.
(a) Determine the Cournot equilibrium. [[q1c = 14; q2c = 14; Qc = 28; pc =
16:]]
(b) Let …rm 1 be the Stackelberg leader and …rm 2 be the Stackelber follower.
(c) Determine the outcome of such a game. [[q1 = 21; q2 = 10:5; p = 12:5,
1 = 156:5, 2 = 46:25]].
(d) Now let …rm 1 be the incumbent wanting to prevent a potential entrant
(…rm 2) from entering the market. How much would the incumbent produce in
order to deter entry, according to Sylos-Labini theory of the "limit price" (as
recounted by Modigliani)? [[q1 = 26; p = 18, 1 = 352.]]
(e) Provide a graphical representation of the "limit price" in this example.

6. Explain the following sentence: "The equilibrium of the Bertrand game

is in weakly dominated strategies."