Elucidate why an increase in one firm output tends

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Reference no: EM1344515

Suppose instead that the firms compete by setting quantities rather than prices. All other facts are the same. It is possible to rewrite the original demand equations as P1 [ 150 ( 2/ 3) Q2] ( 4/ 3) Q1 and P2 [ 150 ( 2/ 3) Q1] ( 4/ 3) Q2. In words, increases in the competitor's output lowers the intercept of the firm's demand curve.

a. Set MR1 MC to confirm that firm 1' s optimal quantity depends on Q2 according to Q1 45 .25Q2. Elucidate why an increase in one firm's output tends to deter production by the other.

b. In equilibrium, the firms set identical quantities: Q1 Q2. Find the firms' equilibrium quantities, prices, and profits.

c. Compare the firms' profits under quantity competition and price competition ( Problem 9). Provide an intuitive explanation for why price competition is more intense ( i. e., leads to lower equilibrium profits).

Reference no: EM1344515

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