Suppose Two Firms, a and B, Compete as Duopolists

question 66

Essay

Suppose two firms, A and B, compete as duopolists. Each firm has a marginal cost of $5 and a fixed cost of zero. Market demand for the duopolists' homogeneous product is given by Q = 100 - 2P.
i)Suppose that the duopolists behave according to Cournot's model. Find Firm A's reaction function given the output of Firm B, and Firm B's reaction function given the output of Firm A.
ii)Compute the Cournot equilibrium quantities for firms A and B.
iii)Now suppose that the two firms work together and form a successful cartel. Find the equilibrium price and quantity in the market.

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Nonprogrammed Decisions

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