Question

Suppose there are 2 firms in a market. They face an aggregate demand curve, P=400-.75Q. Each firm has a Cost Function, TC=750+4q (MC=4). a. If the 2 firms could effectively collude, how much would each firm produce? What is aggregate output? What is price? What are the profits for each firm? Provide a graph illustrating your answer. b. Suppose instead that the firms compete in Quantity (Cournot Competition). Calculate each firm's best-response function using the formulae provided in the book. What is the Nash equilibrium level of production for each firm? What is the equilibrium price? What are the profits of each firm? Provide a graph illustrating your answer. c. Suppose instead that firm A is a Stackelberg leader and gets to choose quantity first. Calculate each firm's best-response function. What is the Nash equilibrium level of production for each firm? What is the equilibrium price? What are the profits of each firm?

Answer 1

Equilibrium condition is where MR = MC.

Under cournot model, firms compete on quantities.

In Stackelberg model, one firm act as leader and other follows. Due to this, leads has first mover advantage.