Thursday, December 13, 2007

Internet Browsers


Spring 2006 practice exam, part 3, question 1a (Internet Browsers): From the information presented in the problem, how do you know there are only two firms in the market?


I admit that this is a confusing question. There aren't two firms in the market, the solution to the problem merely shows that IF there were two firms in the market that, given the market demand that they face, they couldn't both be profitable. This would imply that one of them would exit, leaving a monopoly. A natural monopoly is one where MC is always below ATC. In this example, the constant MC at $10 plus the fixed cost ensures that this will be the case.

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