Consider a homogeneous product industry comprising two firms, N = {1,2}, that compete by choosing their production quantities q₁ 20 and 92 20 to maximize profits ₁ and 2, respectively. Demand in this industry is captured in the following inverse demand function: p = 12 - 2Q, where Q = 9₁ +92 is total output. Firm 1 has constant marginal costs of production equal to c₁ 3 and firm 2 has constant marginal costs of production equal to c₂ = 2. a. Suppose that firms choose their production quantities simultaneously (Cournot competition). Solve for both firms' Nash equilibrium production quantities and profits. b. Suppose now that firms choose production quantities sequentially: firm 1 selects its quantity first, then firm 2 observes firm 1's strategy choice before selecting its own output quantity (Stackelberg competition). Making sure to explain your solution method carefully, solve for both firms' subgame perfect Nash equilibrium production quantities and profits.

Consider a homogeneous product industry comprising two firms, N = {1,2}, that compete by choosing their production quantities q₁ 20 and 92 20 to maximize profits ₁ and 2, respectively. Demand in this industry is captured in the following inverse demand function: p = 12 - 2Q, where Q = 9₁ +92 is total output. Firm 1 has constant marginal costs of production equal to c₁ 3 and firm 2 has constant marginal costs of production equal to c₂ = 2. a. Suppose that firms choose their production quantities simultaneously (Cournot competition). Solve for both firms' Nash equilibrium production quantities and profits. b. Suppose now that firms choose production quantities sequentially: firm 1 selects its quantity first, then firm 2 observes firm 1's strategy choice before selecting its own output quantity (Stackelberg competition). Making sure to explain your solution method carefully, solve for both firms' subgame perfect Nash equilibrium production quantities and profits.

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter16: Government Regulation

Section: Chapter Questions

Problem 6E

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