Suppose there are two pharma companies (A and B) vying to develop the first vaccine to cure AIDS. Assume a fixed MC across the two firms MC_A = MC_B = 4. Assume further that they both face a market demand of P = 12 - 0.00004Q and Q = Q_A + Q_B. 

(a) If firm A is able to enter the market first before firm B, what model would you use to depict this scenario? Why? 

(b) Assume firm B’s reaction function is: Q_B = 125,000 - 0.5Q_A. Compute for: 

(i) Firm A’s Revenue or R_A 

(ii) Firm A’s Marginal revenue MR_A

(iii) Output for firm A or Q_A and output for firm B or Q_B

(iv) Market Q* and P*

Answer rating: 100% (QA)

a If firm A is able to enter the market first before firm B we can use a Cournot model to depict thi... View the full answer