Question

3) Suppose that an industry consists of two firms that produces a homogeneous product. Suppose that each firm decides how much to produce and assumes that its rival will not alter its level of production in response (Cournot Model). The industry demand equation is: P 145 5(Q1+ Q2) where Qland Q2 represents the output of Firm 1 and Firm 2, respectively. The total cost equations of the two firms are: TCF 3Q1 and TCF 5Q2 A, Calculate each firm's Best Response function B. Calculate the equilibrium price, profit maximizing output levels, and profits for each firm. Assume that each duopolist maximizes its profit and that each firm's output decision is invariant with respect to the output decision of each rival C. Suppose that Firm 2 believes that Firm 1 will take the output of Firm 2 as constant. By contrast, Firm 2 will attempt to exploit the behavior of Firm 1 by incorporating Firm 1's reaction of the follower into its own production decisions Stackelberg Model). Calculate the equilibrium price, output levels, and profits of each firm

Answer 1

Answer 2

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