The inverse market demand curve for a duopoly market is p=14-Q=14-q₁-q₂, where Q is the market...

The inverse market demand curve for a duopoly market is p=14-Q=14-q₁-q₂, where Q is the market output, and q₁ and q₂ are the outputs of Firms 1 and 2, respectively. Each firm has a constant marginal cost of 2 and a fixed cost of 4. Consequently, the Nash-Cournot best response curve for Firm 1 is q₁=6-q₂/2.

A. Create a spreadsheet with Columns titled q₂, BR₁, Q, p, and Profit₁. In the first column, list possible quantities for Firm 2, q₂, ranging from 0-12 in increments of 2. THe column headed BR₁ shows the profit-maximizing output (best response) for Firm 1 given Firm 2's output in the first column. The Q column sums the values in the q₂ and BR₁ columns. The p column lists the price that corresponds to Q. The Profit₁ column shows the profit of Firm 1, taking account of its marginal and fixed costs. After filling in the spreadsheet, use the scatterplot option in Excel to draw the best response curve for Firm 1.

B. What is the monopoly output and profit for Firm 1? (That is, how much does Firm 1 produce if Firm 2 does not produce?) If Firm 1 expects Firm 2 to produce 10 units of output, would it operate in the long run (given that it can avoid incurring its fixed costs by shutting down)? Will it operate in the short run (when its fixed costs cannot be avoided)?

Expert Solution

Rahul Sunny answered 1 year ago

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