Using the reaction functions

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Suppose the market demand for boxes of cigars is given by P = 100 – Q. There are two firms, A and B, producing cigars, each with the same constant MC of €5. If the firms: a. Collude and divide the market equally between them, how many boxes of cigars are produced, at what price is a box of cigars sold, and what is the industry profit? b. Act as Bertrand oligopolists (compete on price, match the other firm’s price, as long as P>MC), how many boxes of cigars are produced, at what price are they sold, and what is the industry profit? c. Act as Cournot oligopolists (competing on quantities, and choosing to produce the number of boxes of cigars that maximises their profits, given the number of boxes of cigars they believe the second firm will produce), write down a formula (the ‘reaction function’) that give the output of each firm in terms of the other firm’s output, and d. In the Cournot case (using the reaction functions), calculate how many boxes of cigars each firm produces, the selling price, and the profits each firm earns.

Reference no: EM13982199

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