A new, revolutionary battery has come on the market. There are two firms producing the battery...

 

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A new, revolutionary battery has come on the market. There are two firms producing the battery competing in quantities. The demand for the battery is p = 800 - 4Q, where Q = 9₁ +92. To produce a battery, the firms need to pay $40 per unit for the labour input and $40 per unit for an intermediate input, which is a rare earth metal. Thus, the marginal cost is initially mc₁=mc2 = $80. The two firms compete in quantities. (Total: 40 marks) Construct firm 1's and firm 2's profit functions. Derive the best-response functions for firms 1 and 2 and calculate and illustrate the Nash equilibrium quantities. Calculate the equilibrium prices, profits and Lerner indexes. Interpret the Lerner indexes. In a second graph, illustrate the consumer surplus, producer surplus and the dead-weight loss in the equilibrium. (19 marks) A new, revolutionary battery has come on the market. There are two firms producing the battery competing in quantities. The demand for the battery is p = 800 - 4Q, where Q = 9₁ +92. To produce a battery, the firms need to pay $40 per unit for the labour input and $40 per unit for an intermediate input, which is a rare earth metal. Thus, the marginal cost is initially mc₁=mc2 = $80. The two firms compete in quantities. (Total: 40 marks) Construct firm 1's and firm 2's profit functions. Derive the best-response functions for firms 1 and 2 and calculate and illustrate the Nash equilibrium quantities. Calculate the equilibrium prices, profits and Lerner indexes. Interpret the Lerner indexes. In a second graph, illustrate the consumer surplus, producer surplus and the dead-weight loss in the equilibrium. (19 marks)

Answer rating: 100% (QA)

To construct the profit functions for Firm 1 and Firm 2 we need to consider the following Firm 1s profit function 1 p MC1 Q1 1 800 4Q 80 Q1 1 720 4Q Q... View the full answer