ANSWER ONLY SECOND QUESTION PLEASE, WITH CLEAR STEPS

1. Consider a duopoly with two firms, each with marginal cost function and average cost

function given by MC=AC=20. Further let the inverse market demand be given by:

P = 56 - 2Q

Assume that both firms engage in Cournot competition by setting their optimal quantity.

a) Derive each firm's best response function (reaction function) and show the solution

graphically.

b) What is the Cournot-Nash price and quantity and the firms' profits?

c) How would the firms' profits increase, if they could achieve the cartel outcome? What

are the associated price, quantity and profit?

d) What are the associated price, quantity and industry profit under Bertrand

competition?

2. Now assume that the Cournot game from Problem 1 is turned into a sequential game

where in the first round one firm can determine its output while the other, its rival,

cannot choose its output until the second stage of the game. Assume that the market

demand curve and marginal cost remain the same.

a) What is the reaction function of the first mover?

b) What are the equilibrium price, output of player 1 and player 2 and industry profit?

c) Compare total welfare in the sequential game to the output under Cournot

competition.