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QUESTION 3 PART A Consider an industry where there are only two firms (a duopoly). The industry demand function is given by Q = 100-1/3P (where P is price and Q is total quantity). Both firms have the following total cost function (where q denotes output): TC = 150 + 2q. (a) Calculate and draw the reaction function of Firm 1. [2 marks] (b) Calculate and draw the reaction function of Firm 2. [2 marks] (c) Calculate the Cournot-Nash equilibrium. Find the output of each firm, the total output of the industry, the price and the profit of each firm. [4 marks] 2 (d) Compare social welfare (profits + consumer surplus) at the Cournot-Nash equilibrium with the social welfare that would result if there were only one firm in the industry (with the same cost function as above). Calculate consumer surplus (CS) and producer surplus (PS) and Dead Weight Loss (DWL). Show CS, PS, and DWL on the diagram. How do you explain the result? [5 marks] (e)Suppose Firm 1 is the leading Stackelberg firm, now find the output of Firm 1 and Firm 2. [4 marks] (f) Compare the profit and output of the industry under Stackelberg and Cournot. [4 marks] (g) Which type of market do consumers prefer: monopoly, Cournot duopoly or Stackelberg duopoly? Explain your answer clearly. [4 marks] Part B a) Using examples, explain how a consumer can face uncertainty in his/her decision making. [5 marks] b) Show how decisions may differ if the individual is risk averse or risk seeking. Use relevant diagrams to explain how the risk premium and certainty equivalent differ under each situation. [10 mar [40 n 3/3