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In: Economics

Suppose that there are two firms in an industry and they face market demand y=400-0.5p where...

Suppose that there are two firms in an industry and they face market demand y=400-0.5p where y=y1+y2 . The total cost functions of the firms are C1(y1)= 40y1 and C2(y2)= 2y22.

a) Assume initially that the firms enter into Cournot competition. Calculate the equilibrium market price and each firm’s equilibrium output. That is, find y1c, y2c, and pc.

b) Calculate the equilibrium market price and each firm’s equilibrium output assuming that firm 2 is the Stackelberg leader and firm 1 is the follower. That is, find y1s, y2s, and ps

c) Will the firms prefer collusion (cartel) equilibrium or Cournot game? Based on your calculations in parts above, explain clearly.

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Expert Solution

Rahul Sunny answered 2 years ago
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