Question: Two firms compete by simultaneously choosing quantities. Demand is given by D(p) = 200 2p and each firm's marginal cost is MC(q) = 2q. a.

Two firms compete by simultaneously choosing quantities. Demand is given by D(p) = 200 2p and each firm's marginal cost is MC(q) = 2q.

a. Suppose the firms compete by setting quantities. Find the output of the two firms and the resulting market price.

b. Now suppose the firms decide to collude. Find their new prices and quantities.

c. Are the firms' choice of quantities strategic complements or substitutes? Why or why not? Demonstrate your answer with a graph or equation.

d. Suppose we are back in the collusive equilibrium, and firm 2 cheats while firm 1 continues to produce the collusive quantity. How much will firm 2 produce? What will be the market price?

e. Now suppose the firms choose quantities, but firm 1 chooses first (and its decision is irreversible). What quantity does firm 1 choose? What quantity does firm 2 choose? What is the resulting market price?

f. Which equilibrium do consumers prefer - part (a), (b), (c), or (d)? Why?

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