Assume that two firms are in a Cournot oligopoly market. Market demand is P=120 - Q...

Assume that two firms are in a Cournot oligopoly market. Market demand is P=120 - Q where Q isthe aggregate output in the market and P is the price. Firm 1 has the cost function TC(Q₁)=30 + 10Q₁ and Firm 2 has the cost function TC(Q₂)=15 + 20Q₂.

a) Write down the

Profit function of Firm 1:

Profit function of Firm 2:

b) Using the profit functions in part (a), obtain the reaction function of Firm 1 to Firm 2.

c) Using the profit functions in part (a), obtain the reaction function of Firm 2 to Firm 1.

d) Using the reaction functions from parts (b) and (c), obtain the profit maximizing output level of Firm 1.

e) Using the result from part (d), obtain the profit maximizing output level of Firm 2.

f) Now assume that the firms engage in a sequential quantity competition with Firm 1 as the first mover. Construct the profit function of Firm 1.

g) Using the profit function from part (f), obtain the profit maximizing output level of Firm 1.

h) Obtain the profit maximizing output level of Firm 2.

Expert Solution

Rahul Sunny answered 7 months ago

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