Question: In the Challenge Solution's mathematical model, how much does Firm 1's profit change as the subsidy, s, increases? In the Challenge Solution, assume two firms
In the Challenge Solution's mathematical model, how much does Firm 1's profit change as the subsidy, s, increases?
In the Challenge Solution, assume two firms face an inverse demand function of p=a-bQ, and the marginal cost of each firm is m. A per-unit subsidy, s, given to both firms, reduces each firm's after-subsidy marginal cost to m-s. The best-response function for Firm 1 is q1=(a-m+s)/2b - 1/2q2 and the best-response function for Firm 2 is q2 = (a-m +s)/2b - 1/2q1
Solving, each firm maximizes profits by producing such that q = (a-m + s)/3b
A change in the subsidy changes each firm's profit by derivative of profit i / derivative w.r.t s of......
Please explain your solution in details. Thank you.
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