Two quantity setting firms are in a market with inverse demand curve, P(Q)=100-Q where Q is...

 

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Two quantity setting firms are in a market with inverse demand curve, P(Q)=100-Q where Q is the total quantity sold in the market. Firm 1 has constant marginal costs c1 and firm 2 has constant marginal costs c2. The firms choose quantities simultaneously. (Hint: constant marginal cost c1 means that the total cost when the firm produce Q is c1*Q) 1. i) Compute each firm's best response function as a function of the quantity selected by their rival and as a function of their marginal costs. 2. ii) Draw the best response curves in a diagram with q1 on the horizontal axis and q2 on the vertical axis. Clearly mark the horizontal and vertical intercepts of each curve. 3. iii) In the diagram, show what happens if, starting from a position where c1=c2, firm 1's costs fall by a little bit. Two quantity setting firms are in a market with inverse demand curve, P(Q)=100-Q where Q is the total quantity sold in the market. Firm 1 has constant marginal costs c1 and firm 2 has constant marginal costs c2. The firms choose quantities simultaneously. (Hint: constant marginal cost c1 means that the total cost when the firm produce Q is c1*Q) 1. i) Compute each firm's best response function as a function of the quantity selected by their rival and as a function of their marginal costs. 2. ii) Draw the best response curves in a diagram with q1 on the horizontal axis and q2 on the vertical axis. Clearly mark the horizontal and vertical intercepts of each curve. 3. iii) In the diagram, show what happens if, starting from a position where c1=c2, firm 1's costs fall by a little bit.