Question

Let the market demand for carbonated water be given by QD = 100 − 5P. Let...

Let the market demand for carbonated water be given by QD = 100 − 5P. Let there be two firms producing carbonated water, each with a constant marginal cost of 2.


a) What is the market equilibrium price and quantity when each firm behaves as a Cournot duopolist choosing quantities? What profit does each firm earn?

b) Sketch the Cournot response functions for firm 1 and firm 2.

c) What is the market equilibrium price and quantity when each firm behaves as a Bertrand duopolist choosing price? What firm profit does each firm earn now?

d) Sketch the Bertrand response functions for firm 1 and firm 2.

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Answer #1

Cournot duopoly equilibrium can be obtained when the firms are competing over quantity and Bertrand duopoly equilibrium can be obtained when both the firms are competing over price.

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