Question

Consider 2 tour companies, Blue Dolphin and Aloha Adventures, that are the sole providers of scuba diving trips off of the Hawaiian island of Ni’ihau. They are competing as Cournot duopolists. The market demand function for the market for scuba diving trips to the island is given by: ? = ??? − ?? where ? is the sum of the quantity of trips provided by the two tour companies. The cost function for Blue Dolphin is given by ?(???) = ? ? ??? ? , and the cost function for Aloha Adventures is given by ?(???) = ? ?? ??? ? .

a) If the two companies choose the quantities of trips supplied simultaneously, find the Cournot equilibrium quantities supplied for each firm and the equilibrium price.

b) Suppose that Aloha Adventures has the opportunity to choose their quantity of trips first, so that they are a Stackelberg leader. If Aloha Adventures were to move first, what would be their profit-maximizing level of output?

Answer 1