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In: Economics

Consider a market with two firms, where the firms manufacture commodities that are identical in all...

Consider a market with two firms, where the firms manufacture commodities that are identical in all respects. Firm i produces output level qi , i = 1, 2, and q = q1+q2. The market demand curve is p = a−bq where a and b are positive constants. Firm i earns profits πi(q1, q2) = pqi − ciqi , where ci is its unit-cost of production. Assume 0 < ci < a for i = 1, 2. Finally, assume that Firm 2’s costs per unit are twice as high as Firm 1’s. In other words, assume c2 = 2c1.

a = 100,

b = 1,

c1 = 10,

c2 = 20.

(a) Find the best-response functions for both firms.

(b) Sketch of each best response function, first on separate diagrams, then on the same diagram.

(c) Find the Nash equilibrium

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Expert Solution

Rahul Sunny answered 1 year ago
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