The Cotonou model.
A new market appears that works according to rules of the Cournot model. The costs of those who enter the market as a function of individual supply q is C(q) = F + Cq2, where both F > 0,C > O. The demand is P(Q) = A – BQ as a function of total supply Q, with A > 0, B > 0.
Assume free entry. Calculate the quantity of firms on the market as a function of A, B, C and F. [10 marks]
Assume that entry is not free, but costs Z>0. Calculate the new equilibrium quantity of firms. Are firms interested in having barriers to entry? How about other participants of the economy?
[10 marks]
Sample Solution
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