Consider a market with inverse demand P = a − 2Q. Firms have constant marginal cost c > 0, and no fixed costs.
a) Derive expressions for industry price, quantity, profit, and the Lerner index if this market is served by a monopoly.
b) Derive expressions for the equilibrium industry price, quantity, profit, and the Lerner index if the market is served by Bertrand duopolists (2 firms compete in prices).
c) Compare your answers in (b) to your answers in part (a). d) If a firm could choose between being a monopolist or competing with another firms by choosing prices simultaneously, which would they prefer? Which would consumers prefer? Which is more efficient?
