Question

1. Suppose there are two firms, Boors and Cudweiser, each selling identical-tasting nonalcoholic beer. Consumers of this beer have no brand loyalty so market demand can be expressed as P = 5 − .001(QB + QC). Boors’ marginal revenue function can be written MR = 5 − .001(2QB + QC) and symmetrically for Cudweiser. Boors operates with out-of-date technology and has constant cost of $2 per unit , whereas Cudweiser has constant cost of $1 per unit. Assuming the firms behave as Cournot competitors, Boor’s best-response function is

a. QB = 2,000 − .5QC b. QB = 1,500 − .5QC c. QC = 2,000 − .5QB d. QC = 1,500 − .5QB

Answer 1

Option (b).

For Boors,

TR = P x QB = 5QB - 0.001QB² - 0.001QBQC

MR = TR/QB = 5 - 0.002QB - 0.001QC

setting MR = MC,

5 - 0.002QB - 0.001QC = 2

0.002QB + 0.001QC = 3

2QB + QC = 3,000

2QB = 3,000 - QC

QB = 1,500 - 0.5QC (Best response function)