Suppose there are two firms, 1 and 2, in a market. The firms have total cost functions of 5q1 and 592 respectively. And, they face a market demand...
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Question

 Suppose there are two firms, 1 and 2, in a market. The firms have total cost functions of

5q1 and 592 respectively. And, they face a market demand curve given by Q = 95 - P,

where Q = q1 + q2 is the market quantity.

(a) If the firms are Cournot competitors, calculate the (i) equilibrium quantity produced


by each firm, (ii) the market price, and (iii) the profit earned by each firm.

(b) Draw the firms' reaction functions and show the Cournot equilibrium.

(c) Suppose the two firms have three possible options - form a cartel to act as a

monopoly, act as Cournot duopoly and act as perfectly competitive firms under

a Bertrand setting. Create a table to show (i) individual output level for each firm,


(ii) market output, (iii) market price, (iv) individual profit level for each firm, and

(v) joint profit under the three possible market situation (follow the table shown

in class). Also, based on your table, intuitively compare between the three market

scenarios.

Answered by Expert Tutors

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