Consider a market of two small breweries located across the street from each other. Market demand is P = 18 - .2Q where Q is the number of beer pints per day. Both firms have a marginal cost of c = 2 per pint. The beers are not differentiated and both firms can serve as many beers as much as needed. The firms compete on price.
- What is the expected market price? What would be the associated quantity and firm profit?
- Suppose that one brewery has a marginal cost of c1 = $2.00 but the second brewery changes its production techniques and reduces its marginal cost to c2 = $1.00. Would the market price be different from that in part a? Would firm profits be different? Explain.
- Suppose there are three breweries on the street. One brewery has a marginal cost of c1 = $2.00 and the second and third breweries have a marginal cost of c2 = c3 = $1.00. Would the market price be different from that in part b? Would firm profits be different? Explain.
- Going back to a market with two breweries and equal marginal costs of c = $2. If each brewery could only serve 35 pints a day, would you expect the same market price and firm profits as part a? Show any necessary work.
- Finally, in the market with two breweries and equal marginal costs of c = $2, if consumers showed varying preferences for the beers sold by each brewery, would you expect the market price to differ from part a? Explain. (No calculations needed.).