Please expert I am requesting you to explain well. 1.Consider the following game of firm competition....

Please expert I am requesting you to explain well.

1.Consider the following game of firm competition. Both firms face an inverse demand curve of: P = 120-Q ( where Q = q1+q2 ). Firm 1 has a constant (per-unit) marginal cost of $20, and Firm 2 has a marginal cost of $14.

a) Find expressions for the revenues, costs, and profits of both firms in terms of output

b) Assume that both firms choose output levels simultaneously (eg. the firms are in a Cournot oligopoly). Find the best-response (reaction) curves for both firms and plot them with q1 (the output of firm 1) on the x-axis and q2 (the output of firm 2) on the y-axis. (Hint: the marginal revenues for each firm are: MRi=120-2qi-q-i )

c) Using these reaction curves, find the Cournot-Nash equilibrium levels of output for each firm in the simultaneous move game, and their profit levels at this point. Indicate that point on your best response graph from part a.

d) Now suppose that Firm 1 moves first, and Firm 2 observes q1 before making their decision (ie. The game is now a sequential move Stackelberg oligopoly). Find the new optimal output levels of both firms, and their profits at this new equilibrium. Show each step of the process including the revenues. (Hint: the new marginal revenue for firm 1 is: MR1=67-q1 )

Expert Solution

Rahul Sunny answered 1 year ago

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