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Two firms produce a homogeneous product with an inverse market demand given by P = 100...

  1. Two firms produce a homogeneous product with an inverse market demand given by P = 100 – 2Q, where Q = q1+q2. The first firm has a cost function given by C1=12q1and the second firm has a cost function given by C2=20q2. The firms make simultaneous output choices to maximize profit. Determine the equilibrium values of firm outputs, market output, price, and firm profits.
  2. With reference to question 1, now assume that decision-making is sequential with firm 1 choosing its output first (leader) and firm 2 choosing second (follower). Determine the equilibrium values of firm outputs, market output, price, and firm profit levels.
  3. In the above question, there is clearly an advantage to the firm that chooses first. How should we measure the value of the first-mover advantage? Calculate this value for the first firm relative to values in question 1.
  4. Return to the situation in question 1. Suppose demand increases by 100 units at each price. Solve for the equilibrium values of firm outputs, market output, price and firm profits.

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Expert Solution

Rahul Sunny answered 8 months ago
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