Question

The market for nutmeg is controlled by two small island economies, Penang and Grenada. The inverse market demand for bottled nutmeg is ? = 60 − 0.5?, where ? = ?P + ??. Here, ? is the total quantity produced, ?? is Penang’s quantity produced and Q? is Grenada’s quantity produced. The countries make their quantity choices independently and simultaneously. Neither Grenada nor Penang have fixed costs. Grenada produces nutmeg at a constant marginal cost of $12, and Penang produces nutmeg at a constant marginal cost of $10.

6.1. Find Grenada’s best-response (reaction) function.

6.2. Find Penang’s best-response (reaction) function.

6.3. Find the Cournot equilibrium quantity of nutmeg for each island.

6.4. What is the market price of nutmeg?

6.5. What is each firm’s profit? Explain why they are similar or different.

Answer 1