Question

# Consider two identical firms competing in a market described by: • (Inverse) Demand: P = 50...

Consider two identical firms competing in a market described by:

• (Inverse) Demand: P = 50 − Q , where Q = q1 + q2

• Cost Firm 1: C1 = 20q1 +q1^2

• Cost Firm 2: C2 = 20q2 + q2^2

a. (1 point) What is firm 1’s marginal cost? Firm 2’s marginal cost? What can you observe about these two firms?

b.(2 points) What are the equilibrium price (P∗), production quantities (q∗1,q∗2), and profits(π∗1,π∗2), if these firms are rivals – what is the outcome in the perfectly competitive model?

c. (2 points) What are the equilibrium price (P∗), production quantities (q∗1,q∗2), and profits(π∗1,π∗2), if these firms collude – what is the outcome in the monopoly model?

MC for Firm 1

MC1=20+2q1

MC for Firm 2

MC1=20+2q2

Both firms are identical and change in cost for each additional output depends on quantity and MC is non zero even if no production happens at all.

When both the firms are rivals of each other they observe other firm's output level and gives the best response to maximise the profit.

#### Earn Coins

Coins can be redeemed for fabulous gifts.