Question

Oligopoly The inverse demand curve for brimstone is given by p(Y) 116-3Y (with Y total quantity of brimstone, measured in the conventional units) and the cost function for any firm in the industry is given by TC(y)-8y (with y the output of the firm) a. Determine the industry output and price if the brimstone industry were perfectly competitive Suppose that two Cournot firms operated in the market (Firm 1 and Firm 2) Determine the reaction function of Firm 1. Do the same for Firm 2. Determine industry output, the output of each firm, and the market price if the firms are operating at the Cournot equilibrium point. What will be the industry output and the market price if both firms decide to collude? Suppose both of the colluding firms are producing equal amounts of output. If one of the colluding firms assumes that the other firm would not react to a change in the industry output, what would happen to a firm's own profits if it increased its output by one unit? Construct the profit matrix of the collusion game where firms can take two actions (1). Producing the Cournot output from b. (2). Producing the half of the industry output in c b. c. d. e. f. Determine the best response of Firm 1 to the actions of Firm 2. g. Give the Nash equilibrium of the profit matrix from the collusion game in e. h Suppose Firm 1 acts as a Stackelberg leader and Firm 2 behaves as a follower. Write down the maximization problem for the leader. Solve the problem: give the output levels of the leader and the follower, the industry output, and the market price.

Answer 1

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