In: Economics
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.
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