Assume that the inverse demand function is given by P = 240 − Q. The discount factor is 0.9. Marginal production costs are initially £120.
(a) Calculate the market equilibrium price, output, and profits on the assumption that the market is currently: (i) monopolized, and (ii) a Bertrand duopoly with homogeneous products. Note that in the duopoly case with identical marginal costs, if firms charge the same price, they share the market equally.
(b) Suppose that a research institute develops and obtains a patent for a new technology that reduces the marginal costs to £60. Calculate the new market equilibrium price, output, and profits for (i) the monopolist, and (ii) each duopolist. Note that in the duopoly case, the innovation is made available to only one firm, and if both firms charge the same price, consumers always buy from the most efficient firm.
