425-hw3-duopoly - K 2 . Find the value of K 2 that makes...

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ECON 425 Assignment #3 Consider the following duopoly market where the market demand curve is given by p = 120 ( q 1 + q 2 ) where q 1 and q 2 Firm 1 0 s cost function is C 1 = K 1 + 35 q 1 2 0 s cost function is C 2 = K 2 + 40 q 2 Where K 1 , and K 2 are set up costs that are sunk costs upon entry. can let K 1 = 0 since it is sunk) (a) Assume that the entrant expects a Stackleberg equilibrium. Solve for the equilibruim quantities K i What value of K 2 out? (b) Assume that the entrant expects a Cournot equilibrium. Solve for the equilibruim quantities and K i What value of K 2
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Unformatted text preview: K 2 . Find the value of K 2 that makes &rm one indi/erent between limit strategy and letting the entrant in (this means comparing your limit output pro&t to your answers in (a) and (b) 2. Now suppose both &rms are deciding to enter the market. First they choose a technology (one of the two cost functions above).then they play a cournot game. However, &rm one gets to choose a technology and enter &rst. Firm two chooses second and then enters. (a) Draw the game tree for all possible choices. (b) Find the range of values of K 1 and K 2 such that Firm one would choose C 1 (knowing what &rm two will choose) and that, once &rm one has chosen, &rm two chooses C 2 1...
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