Two profit maximizing oligopolists produce electricity. They set their productions levels,y1 and y2, simultaneously. p(y) =...

Two profit maximizing oligopolists produce electricity. They set their productions levels,y1 and y2, simultaneously. p(y) = 10−y, where y=y1+y2. Assume the cost curve for firm 1 and firm 2 are C(y1) = 2y1 and C(y2) = 2y2 respectively. Marginal cost for each firm is constant at 2.

Suppose firm 1 is the leader and sets the quantity first. Firm 2 is the follower.

(Stackelberg)

1. Write down each firm’s profit maximization problem

2. Determine the optimal (equilibrium ) levels of production y^S_1 and y^S_2.

3. Determine the Consumer Surplus, Producer Surplus and Dead weight loss.

4. In a diagram compare the equilibrium output in Problem 3 and 4 by using the best response for firm 1 and firm 2.

Expert Solution

Rahul Sunny answered 2 years ago

Two profit maximizing oligopolists produce electricity. They set their productions levels,y1 and y2, simultaneously.p(y) = 10−y,...

Two profit maximizing oligopolists produce electricity. They set their productions levels,y1 and y2, simultaneously.p(y) = 10−y, where y=y1+y2. Assume the cost curve for firm 1 and firm 2 are C(y1) = 2y1 and C(y2) = 2y2 respectively. Marginal cost for each firm is constant at 2. Suppose firm 1 and firm 2 decide their output simultaneously. 1. Write down each firm’s profit maximization problem. 2. Determine each firm’s best response function (i.e BR1(y2) and BR2(y1)) and plot it on a...

(1 point) In general for a non-homogeneous problem y′′+p(x)y′+q(x)y=f(x) assume that y1,y2 is a fundamental set...

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