Answer_Key_Econ_342_Exam_1_Version_A - Econ342Exam1 McLeod...

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McLeod Name __________________________________  ID#  _____________________________________ 1.  (76 total points) 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 = 8q i , i = 1,2, where q i  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 = 200 –4Q, where Q= q 1  + q 2  is the total  industry output. The following formulas will be useful: If market demand is given by P = a –bQ, then MR 1  = a – 2bq 1  – bq 2 MR 2  = a – bq 1  – 2bq 2 For parts a-c, assume the firms choose their quantities simultaneously.   a) (6 points) What is firm 1’s reaction function? (Write the equation.) q 1  = 24- ½ q 2 b) (6 points) Determine the Nash equilibrium in quantities; that is, how much output will each  firm produce in equilibrium? q
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This note was uploaded on 01/27/2010 for the course ECON 342 taught by Professor Mcleod during the Spring '09 term at Pennsylvania State University, University Park.

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Answer_Key_Econ_342_Exam_1_Version_A - Econ342Exam1 McLeod...

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