Question (7 Version 1) [24 marks] Consider a Cournot oligopoly with two firms, denoted as i = 1,2. Each firm i has the same total cost function TCi(qi) = cqi. Firm 1's output is an imperfect substitute for firm 2's output ( and vice versa.) Hence firms have different (but symmetric) inverse demands. The inverse demand for firm 1 is P = a - bq - dq2. Inverse demand for firm 2 is P2 = a - bq2 - dq. Assume that d < b. (a) We know that MRi P+ qi. Use this fact to express firm 1's marginal revenue as an explicit and simplified function of 91, and 92. = dPi dqi (b) Use your answer to part (a) to derive firm 1's reaction function. (c) Use your answer to part (b), and the symmetry of the model to arrive at a reaction function for firm 2. Now set a = 11, c = = 1, b = 2 and d 1; and solve for the Cournot equilibrium outputs. == = (d) Let us say that d and d are two different possible values for d with d < d. For which value of d would the two firms make a higher profit? Explain (50 words or less.)