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Suppose there are two firms operating in a market. The firms produce identical products, and the...

Suppose there are two firms operating in a market. The firms produce identical products, and the total cost for each firm is given by C = 8qi, i = 1,2, where qi is the quantity of output produced by firm i. Therefore the marginal cost for each firm is constant at MC = 8. Also, the market demand is given by P = 56 –4Q, where Q= q1 + q2 is the total industry output.

The following formulas will be useful:

If market demand is given by P = a –bQ, then

• MR1 = a – 2bq1 – bq2

• MR2 = a – bq1 – 2bq2

Assume the firms choose their quantities simultaneously.

a)Determine the Nash equilibrium in quantities; that is, how much output will each firm

produce in equilibrium?

b) What will be the market price?

c) What is the deadweight loss?

d) Using a single graph, draw the reaction functions for each firm and identify the Nash Equilibrium. Make sure your graph is accurate and properly and completely labeled.

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Answer #1

Best response graph can be easily made just by putting both equation of best response on the graph and their intersection point is equilibrium.

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