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There is a Cournot game consisting of two different firms that produce the same goods. Quantity...

There is a Cournot game consisting of two different firms that produce the same goods.

Quantity produced by firm one = q

Quantity produced by firm two = q2

The marginal cost for firm one equals average cost, which is 3.

The marginal cost for firm two equals average cost, which is 4.

The formula for the inverse demand curve of the market is P = 70 - (q1 +q2).

Answer the following questions with work:

1. What is the profit function of the firms?

2. What is the ideal reply function of the firms?

3. What is the Nash Equilibrium quantities of the firms q1* and q2*?

4. What are the equilibrium profits of both firms, and which of the two firms is making the highest profit?

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