When both firms set quantity and reaction function

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Reference no: EM131000222

Wolfe and Baker are the only two firms producing door stopers because of such a small market in their area. Both firms are profit maximizing, have a marginal cot of $8 (MC = $8) and have no fixed costs (FC = $0). The demand for door stopers is given by function P = 32 - Q, where P is in dollars and Q is in thousands of door stopers. Because of only two producers for the market, the total quantity in the market is given by Q = Qm + Qn, where Qm is the nmber of door stopers that Wolfe produces and Qn is the number of door stopers Baker produces.

Both Wolfe and Baker choose what quantity to produce. So this market is a Cournot duopoly.

A. When both firms set quantity, Wolfe's reaction function is (nonexistent, Qm = 16 - 0.5 Qn, Qm = 12 - 0.5Qn, Qm = 16 - 2Qn, Qm = 32 - Qn, Qm = 12 - 2Qn) and Baker's reaction function is (nonexistent, Qn = 12 - 2Qm, Qn = 12 - 0.5Qm, Qn = 16 - 0.5Qm, Qn = 32 - Qm, Qn = 16 - 2Qm).

B. Now plot on a graph Wolfe's reaction curve and Baker's reaction curve. IF either company has no reaction curve, just say no reaction curve.

C. If Baker believes that Wolfe will produce a quanity of 16,000 door stopers, Baker's best response would be to produce (4,000, 8,000, 10,000, 12,000, 16,000) door stopers. If Wolfe believes that Baker will produce (4,000, 8,000, 10,000, 12,000, 16,000) then Wolfe's best response would be to produce 10,000 door stopers.

D. On the graph created, mark the equilibrium of this market

E. When Wolfe and Baker are quantity setters, the total equilibrium market quantity will be (8,000, 12,000, 16,000, 18,000, 24,000) door stopers and the equilibrium market price will be ($12, $14, $16, $20, $24). In equilibrium, Wolfe and Baker will each produce (4,000, 6,000, 8,000, 9,000, 12,000) door stopers and make a profit of ($36,000, $64,000, $72,000, $96,000, $120,000).

Reference no: EM131000222

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