# Answer_Key_Econ_342_Exam_1_Version_B - Econ 342 McLeod Exam...

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Exam 1 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 = 5q 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 = 5. Also, the market demand is given by P = 113 –3Q, 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 = 18- 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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Answer_Key_Econ_342_Exam_1_Version_B - Econ 342 McLeod Exam...

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