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Two firms, A and B, are Cournot competitors facing the inverse market demand P = 5...

Two firms, A and B, are Cournot competitors facing the inverse market demand P = 5 - 0.001Q, where Q = qA + qB. Each firm has the same total cost function Ci = 2qi , i = A, B.

a. (8) Write out the profit function of firm A, then derive the best response functions for A and B. (You only need to derive one best response function because A and B are identical.) Carefully graph the best response functions, with A’s quantity on the vertical axis, making sure to label both axes and curves.

b. (8) Find each firm’s output, the market quantity and price, and each firm’s profit.

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