Fins the best response function for firm

Reference no: EM133319122

Question 1. Consider the inverse market demand below for a market with two dominant firms: P=200-3(Q1+Q2) The first firm has the following total cost function: TC1=26Q1 The second firm has a different total cost function: TC2=32Q2

A. Which firm has the lowest average total cost? How about the firm with the lowest marginal cost?

B. Let's say that these two firms engage in a Cournot duopoly. Do they choose price to maximize their profit, or do they choose their quantity to maximize their profit?

C. Fins the best response function for Firm 1. Provide detailed solution.

D. Find the best response function for Firm 2. Provide detailed solution.

E. Given your answers to parts c and d, compute the equilibrium outputs. Provide detailed solution.

i. How much Firm 1 produces at equilibrium (Q1*)?

ii. How much Firm 2 produces at equilibrium (Q2*)?

F. Consider another quantity of production, noted as Q1L, which is on the best response line for Firm 1, but it is lower than Q1*; i.e., Q1L < Q1*. If we ignore what Firm 2 does, would producing at Q1L maximize Firm 1's economic profit? Explain briefly.

G. Compute the equilibrium market price. Provide detailed solution.

H. Using your answers to parts e and g, compute the equilibrium profits. Provide detailed solution.

i. How much profit would Firm 1 earn at equilibrium (π1*)?

ii. How much profit would Firm 2 earn at equilibrium (π 2*)?

Reference no: EM133319122

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