Question: Consider a Cournot duopoly with a linear demand & cost functions. Assume that q1 and q2 are quantities of homogenous items produced by two firms

Consider a Cournot duopoly with a linear demand & cost functions. Assume that q1 and q2 are quantities of homogenous items produced by two firms (1 &2). Let P= 140-2(q1+q2) and firms cost functionsare given by C1= 5+20q1andC2= 10+25q2.

Answer the following questions;

a)Calculate the Cournot equilibrium output, price and profit for each firm. [ 6marks]

b) Assume a Stackelberg duopoly where firm 1 moves first (leader) and firm 2responds. Show that Profit for firm1 is greater than the Cournot duopoly and that profit for firm 2 is lower than for firm 2 under Cournot duopoly in (a) above. [6]

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