Question

In: Economics

Pukka and Twinings are two British tea companies competing in the market. Their products are homogeneous,...

Pukka and Twinings are two British tea companies competing in the market. Their products
are homogeneous, and the market demand function is given by ?? = 120 − 4??, where ?? is
price and total quantity is ?? = ???? + ????. ???? is the quantity produced by Pukka and ???? is the
quantity produced by Twinings. Each firm faces a marginal cost ???? = 20.
a) Derive the reaction function for each firm and graph them in the same diagram.


b) What is the Cournot equilibrium price and quantity for each firm in this market?

c) Assume now that Pukka faces a marginal cost ?????? = 20 but Twinings faces a
marginal cost ?????? = 15. What is the new Cournot equilibrium quantity and price? In
less than 10 lines, provide intuition for your answer.

Solutions

Expert Solution

B) at cournot eqm, best response functions of both firms intersect

So QP = QT = 8.33

So Q = 16.66

P = 120-4*16.66

P = 53.33

​​​​​​

C)

Now at new CN eqm

Two BR functions cut

So Qp = 7.917

QT = 9.167

Q = 17.084

P = 51.664

Thus BR function of firm T shifts parallely upwards, so QT rises & QP falls, & eqm price is lower

as T is Lower cost firm , so it should produce more


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