Question

3. Cournot model:

Quantity competition in simultaneous move homogeneous product duopolyó explain in words.

The market for bricks consists of two firms that produce identical products. Competition in the market is such that

each of the firms simultaneously and independently produces a quantity of output, and these quantities are then sold

in the market at a price that is determined by the total amount produced by the two firms. Firm 2 has a patented

technology that provides it with a cost advantage over firm 1. A recent study found that the market demand curve

faced by the two firms is P = 1 - 0.00001 (x +y), and Costs are C1(x) = 0.04x and C2(y) = 0.1y, and where firm 1 produces x units and firm 2 produces y units of bricks.

(a) Determine the reaction function for each firm.

(b) How much output will each firm produce in equilibrium? At what price? How much will be the equilibrium profit

for each firm?

4. RELATED TO QUESTION 3.

Stackelberg model:

Quantity competition in sequential move homogeneous product duopoly explain in words.

Refer to the information given before part a of Question 3. Suppose firm 1 is a "naive" Cournot duopolist so that firm

2 can act as a Stackelberg leader.

(a) What level of output will each one of them produce in equilibrium? At what price? How much will be the

equilibrium profit for each firm?

(b) Ignoring antitrust considerations, would it be profitable for firm 1 to merge with firm 2? Explain.

Answer 1

3)

4)