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Unformatted text preview: response. By analyzing lets say the equation is P= 120- Q so MR is 120 – 2q, and firm A is producing 60 therefore the new firm B will produce P = 120 – (60 + 2Q), so in order to maximize revenue B produces 30 Then because b is at 30, a does 45, then A and B continuously change till the equilibrium is at A=B which is at 40, to verify this we plug 40 into each RF and price is 40 dollars, total profits 3200; two firms would have been better off if they split the 3600 `d. Stackelberg equilibrium; which firm is more brave and doesn’t want to change; similar to the game of chicken, when you realize that cournot will happen if another firm happens and one firm holds price and hopes the other firm wont change it For normal goods, Compensating Variation, <CS, <Equivalent Variation For inferior goods Equivalent < CS < Compensating Compensating is steeper than ordinary if its normale...
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- Fall '07
- Game Theory, substitution effects Equivalent, final optimal points