Consider two firms competing to sell a homogeneous product by setting price.The inverse demand curve is given by P = 6 − Q.If each firm's cost function is C_i(Q_i)= 2Q_i,then consumer surplus in this market is: A) $2. B) $4. C) $8. D) There is insufficient information to determine consumer surplus in this market.

Question

Quizplus · Accepted Answer

The equilibrium price and quantity can be found by setting each firm's marginal cost equal to the market price:
MC1 = MC2 = P = 6 - Q
Solving for Q gives Q = 2. At this quantity, the price is P = 6 - 2 = 4. Thus, each firm sells Q = 1 and earns a profit of π = (4 - 2) × 1 = $2.
Total industry output is Q = 2, so each consumer purchases 1 unit at a price of $4. Using the inverse demand function, we can find the consumer surplus as:
CS = (1/2) × (6 - 4) × 1 = $1
Thus, total consumer surplus in the market is $2, which is option C.

Consider Two Firms Competing to Sell a Homogeneous Product by Setting