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Homework answers / question archive / A new firm enters a market that is initially serviced by a Cournot duopoly charging a price of $20
A new firm enters a market that is initially serviced by a Cournot duopoly charging a price of $20. What will the new market price be should the three firms coexist after the entry?
A. $20
B. Above $20
C. Below $20
D. None of the preceding answers is correct.
The correct answer is: C. Below $20
When a third firm enters a Cournot duopoly so that we now have three firms, the effect will be a reduction in the price charged by each firm. The price reduces because the entry of the third firm increases the market supply which in turn pulls the price downwards.
