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1. Consider two Cournot duopolists. Each firm sells a homogenous product and has a MC =...

1. Consider two Cournot duopolists. Each firm sells a homogenous product and has a MC = c per unit, and no fixed costs. Market demand is P = a−bQ, where market quantity sold Q = q1 +q2, where q1 is firm 1’s output and q2 is firm 2’s output. Each firm simultaneously chooses its quantity to sell, then lets price clear the market.

a. What is firm 1’s best response function (or reaction function)?

b. Solve for the profit maximising level of q1?
c. What is firm 1’s profit and what is the market price?

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