Suppose there are two firms facing a common market withdemand function p= 12 - Q. Suppose both firms’ marginal cost are mc= 2.

(Cournot Competition.) Suppose there are two firms facing a common market withdemand function p= 12 - Q. Suppose both firms’ marginal cost are mc= 2. Let’s assume that these two firms are playing the cournot competition game.

(a) Write down the profit function of both firms.

(b) Solve the best response function of the two firms.

(c) Compute the Nash Equilibrium.

(d) Now assume that the first firm has the first mover advantage. Calculate the new equilibrium (the Stackleburg equilibrium.)

Expert Solution

Rahul Sunny answered 2 years ago

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