Solve the second stage equilibrium quantities and price

Reference no: EM132198017

Question: Suppose two firms compete over quantities. Inverse demand is given by P 16- 2Q, where Q = Q1 + Q2. At first, two firms have identical marginal cost MC = 4. Suppose the game has two stages. In the first stage, (only) firm 1 can lower its marginal cost by k1 by investing k₁²? in R&D. In the second stage, two firms compete over quantities.

a. Solve the second stage equilibrium quantities and price at a function of k1.

b. What is firm 1's optimal k1?

Reference no: EM132198017

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