1. Duopoly quantity-setting firms face the market demand: P = 600–(1/2)Q where Q = Q1 +...

1. Duopoly quantity-setting firms face the market demand:

P = 600–(1/2)Q

where Q = Q1 + Q2. Each firm has a marginal cost of $60 per unit and zero fixed costs.

(a) What are the quantities chosen by each firm in the Cournot equilibrium? What is the market price?

(b) What are the quantities chosen by each firm in the Stackelberg equilibrium, when Firm 1 moves first? What is the market price? How does this market price compare to the market price under Cournot?

(c) What are the profits of firms 1 and 2 under Cournot vs. Stackelberg equilibrium? Is firm 1 better off under Cournot or Stackelberg competition? What about firm 2? In which equilibrium are consumers better off (hint: compare the size of consumer surplus, given the equilibrium price and quantity under Cournot vs. Stackelberg?

Solutions

Expert Solution

Rahul Sunny answered 11 months ago

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