Consider a market with n firms, where all firms produce identical commodities. The market demand curve...

Consider a market with n firms, where all firms produce identical commodities. The market demand curve is p = a − bq where a > 0 and b > 0, and where q = q1 + q2 + · · · + qn, with qi being the quantity produced by Firm i, i = 1, . . . n. Firm i’s profits are πi(q1, q2, . . . , qn) = pqi − cqi , where c is the per-unit cost of production. (Note that c is the same for all firms.)

(a) Find the best-response function for firm i.

(b) What is a Nash equilibrium in this game?

(d) What is the market price in equilibrium? What are profits for each firm?

(e) What happens to the price and to profits as n goes to infinity? Compare this outcome to the case of perfect competition.

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Expert Solution

Rahul Sunny answered 1 year ago

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