Question

4. Al and bert each own gidgets producing firms, in a duopoly market. The gidgets produced by Al and Bert are identical and both the firms have identical costs.

These are the demand and cost conditions

Demand: P=248-4Qt=248-4QA-4Qb

Cost: ATCA=ATCB=MCa=MCb=$8

a. assume first that al and bert come to an agreement and collude to form a profit maximizing cartel. the firms split the output and profits equally. Find cartel output, and profits.

Cartel output=_____ Price=_____ Firm output=_____ Firm profits=______

b. Now assume the cartel splits up and al and bert start a price war. Now find price, output and profits

Price=_____ Total output=_____ Firm output=_____ Firm profits=_____

c. Al and bert come to their senses somewhat and decide to conduct their competition over quantity instead. (Cournot) Find price. output and profits.

Price=_____ Total output=_____ Firm output=_____ Firm profits=_____

d. compare the profits that they earn when they compete as Cournot rivals in part c, with their profits if they cooperate (part a). of course they are better off cooperating. But the problem is both firms have an incentive to cheat (renege) on the deal. Use the reaction functions you constructed for part c to find the profit maximizing output for one of the firms (the cheater) is the other (the victim) sticks with the agreed output and then find the price and respective profits.

Cheaters output=_____ total output=_____ price=____ cheaters profits=_____ victims profit=_____

e. now use the information to create a payoff table.

Answer 1

It's mandatory to answer only first Four parts