Q1- Suppose that the market for bottled water is perfectly competitive.
a. Draw the current equilibrium, using graphs for the entire market and for an individual bottled water company.
b. Now suppose that a scientific study find that tap water is toxic, and everyone should drink only bottled water. Illustrate the impact of this study on the market and each firm. Use graphs to illustrate your answer.
c. What will happen in the long run to this market and each firm?
Q2- Suppose that mergers have changed the bottled water market to a duopoly with the following demand curve:
|
Price
|
Quantity Demanded
|
|
8
|
300
|
|
7
|
400
|
|
6
|
500
|
|
5
|
600
|
|
4
|
700
|
|
3
|
800
|
|
2
|
900
|
|
1
|
1000
|
What outcome (profit, price and quantity) would you expect if the firms were colluding (assume MC = 0)? What if they competed (i.e. what is each company's dominant strategy and what is the Nash Equilibrium)?
Q3- Now assume that the bottled water market is a monopoly because of even more mergers. Illustrate graphically the monopolist's: profit, quantity, and price and deadweight loss. If the monopolist can perfectly price discriminate, what happens to your answers? Given this, is price discrimination a good or bad thing for a monopolist to pursue?