Consider the market for drilling bits. Assume there are two companies with identical
cost stricture and an inverse marke demand curve of
P =96-8Q
Assume marginal cost of MC = 16.
A) Determine the equilibrium price and quantity under joint profit maximization (cartel).
Cournot duopoly and Bertrand competition. B) Show and calculate consumer surplus, producer surplus and total surplus for all three
market structures. Which outcome do you think is most likely?
C) Use the example to illustrate the first theory of welfare economics and the concept of
Pareto optment.