Assume a duopoly (firms 1 &2) has the following demand: P=100-0.5(q1+q2) where q1 and q2 are outputs for firm 1 and 2 respectively. The cost functions are as follows: c1=5q1 and c2=0.5q2^2

1. If the firm maximizes individual profits (cournot solution):

(I) How much will each firm produce? Be sure to state each firm's reaction function.

(ii) How much profit does each firm make?

(iii) What are the industry's total output and market price?

2.If the above firms collude and maximize industry profits:

(I) How much will each firm produce?

(ii) What are the industry output and market price?

(iii) What is the industry profits?

(iv) How do your results in part (2) compare with those obtained in part (1)? Explain

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Cournot Solution Individual Profit Maximization 1 Firm Quantities and Reaction Functions Profit maxi... View the full answer