<p>Knowing that demand is linear, we can deduce from the two points on the demand curve, <span class="math-container">$(q,p)\in\{(1,2),(2,3)\}$</span>, that the demand function is <span class="math-container">$p=7-2q$</span>, which is consistent with the Company A's profit maximizing quantity being <span class="math-container">$2$</span> units (assuming no fixed cost). </p>

<p>If B enters the market and competes in quantity, the Cournot outcome is <span class="math-container">$q_A=q_B=\frac23$</span> and <span class="math-container">$p=\frac{13}3$</span>. Taking into account B's fixed cost of <span class="math-container">$1$</span> for entering the market, its profit is 
<span class="math-container">\begin{equation}
\left(\frac{13}3-3\right)\frac23-1=-\frac19&lt;0.
\end{equation}</span>
Hence it's not profitable for B to enter. </p>

<p>If B enters the market and competes in price, the Bertrand outcome is <span class="math-container">$p_A=p_B=3$</span>. In this case, revenue is equal to the cost of production, so B makes zero profit (absent the entry cost). However, given the positive cost of entry, B would be making a loss if it enters the market.</p>

CC BY-SA 4.0
2019-02-01T00:45:28.230Z
2019-02-01T00:45:28.230Z
Herr K.
<p>Say Company A has a monopoly producing product E, at a constant marginal cost of <span class="math-container">$3$</span> USD. Say the ideal number of units produced is <span class="math-container">$1$</span> unit which produces a profit of <span class="math-container">$2$</span> USD (=<span class="math-container">$P_{A}$</span>). </p>

<p>Next, Company B wants to enter the market and produce product E at a marginal cost <span class="math-container">$3$</span> USD, but it has initially invested <span class="math-container">$\frac{1}{2}P_{A}$</span> in order to enter the market. </p>

<p><strong>Question:</strong></p>

<p><span class="math-container">$1.$</span> Under Cournot Competition, should Company B enter the market. Why/Why not?</p>

<p><span class="math-container">$2.$</span> Under Bertrand Competition, should Company B enter the market. Why/Why not?</p>

<p>Ideas: </p>

<p><span class="math-container">$1.$</span> No, since we are in Cournot competition, the price is determined by the total units that both Company A &amp; B produce together. If Company B were also to produce, it would drive the price down as a result of excess supply, eventually forcing the price below the marginal cost, thus not profitable</p>

<p><span class="math-container">$2.$</span> Yes, the price is driven down until the marginal cost. Although Company B will earn <span class="math-container">$\frac{1}{2}P_{A}$</span> less than company A.</p>

<p>Do my answers suffice, or rather, are they correct, and touch on the right point? </p>

CC BY-SA 4.0
2019-01-31T19:25:37.240Z
There does not seem to be enough information to answer Q1. You need to know more about the demand curve (e.g. is it linear, what's the quantity demanded when price is 3). For Q2, the answer should be no.
Herr K.
CC BY-SA 4.0
2019-01-31T22:34:52.227Z
@HerrK. The quantity demanded at $p=3$ is $2$. And the demand curve is linear. What is the exact reasoning for Q2?
MinaThuma
<macroeconomics><microeconomics><elasticity><monopoly>
Should Company B enter the market in the following cases
MinaThuma
# Should Company B enter the market in the following cases

(Asked by: username_0 on 2019-01-30)

Say Company A has a monopoly producing product E, at a constant marginal cost of $3$ USD. Say the ideal number of units produced is $1$ unit which produces a profit of $2$ USD (=$P\_{A}$).

Next, Company B wants to enter the market and produce product E at a marginal cost $3$ USD, but it has initially invested $\frac{1}{2}P\_{A}$ in order to enter the market.

**Question:**

$1.$ Under Cournot Competition, should Company B enter the market. Why/Why not?

$2.$ Under Bertrand Competition, should Company B enter the market. Why/Why not?

Ideas:

$1.$ No, since we are in Cournot competition, the price is determined by the total units that both Company A & B produce together. If Company B were also to produce, it would drive the price down as a result of excess supply, eventually forcing the price below the marginal cost, thus not profitable

$2.$ Yes, the price is driven down until the marginal cost. Although Company B will earn $\frac{1}{2}P\_{A}$ less than company A.

Do my answers suffice, or rather, are they correct, and touch on the right point?

**Tags:** macroeconomics, microeconomics, elasticity, monopoly

> **Comments:**
> **username_1**: There does not seem to be enough information to answer Q1. You need to know more about the demand curve (e.g. is it linear, what's the quantity demanded when price is 3). For Q2, the answer should be no.  
> **username_0**: @HerrK. The quantity demanded at $p=3$ is $2$. And the demand curve is linear. What is the exact reasoning for Q2?  

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## 1 answers

### Answer by username_1 on 2019-02-01. Score: 1 | Accepted answer

Knowing that demand is linear, we can deduce from the two points on the demand curve, $(q,p)\in\{(1,2),(2,3)\}$, that the demand function is $p=7-2q$, which is consistent with the Company A's profit maximizing quantity being $2$ units (assuming no fixed cost).

If B enters the market and competes in quantity, the Cournot outcome is $q\_A=q\_B=\frac23$ and $p=\frac{13}3$. Taking into account B's fixed cost of $1$ for entering the market, its profit is
\begin{equation}
\left(\frac{13}3-3\right)\frac23-1=-\frac19<0.
\end{equation}
Hence it's not profitable for B to enter.

If B enters the market and competes in price, the Bertrand outcome is $p\_A=p\_B=3$. In this case, revenue is equal to the cost of production, so B makes zero profit (absent the entry cost). However, given the positive cost of entry, B would be making a loss if it enters the market.


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