Suppose duopolists in the market for spring water share a market demand curve given by P = 50 - 0.02Q,where P is the price per gallon and Q is thousands of gallons of water per day.The marginal cost of producing water is near zero for both firms.If firm A produces zero,firm B's best response is producing:
A) 0 gallons of water per day.
B) 48 gallons of water per day.
C) 833 gallons of water per day.
D) 1,250 gallons of water per day.
E) 2,500 gallons of water per day.

Question

Quizplus · Accepted Answer

If firm A produces zero, firm B will act as a monopolist. The monopolist's output is where marginal revenue equals marginal cost. The marginal revenue curve has the same intercept as the demand curve but twice the slope, so MR = 50 - 0.04Q. Setting MR = 0 (since MC is near zero), we get 50 = 0.04Q, so Q = 1,250 gallons.

Suppose Duopolists in the Market for Spring Water Share a Market