The Inverse Demand for Coffeemakers Is Given by P =

question 165

Essay

The inverse demand for coffeemakers is given by P = 80 - 0.02Q, where P is the price and Q is the total number sold in the local market. There are two manufacturers operating in the local market. Firm 1's cost function is given by C₁ = 0.01q₁², where q₁ is the number brought to market by firm 1. Firm 2's cost function is given by C₂ = 0.02q₂², where q₂ is the number brought to market by firm 2. The two firms are Cournot competitors that compete by setting output so that Q = q₁ + q₂. Use calculus for the following.
a. Write firm 1's profit function and identify firm 1's reaction function to firm 2's output.
b. Write firm 2's profit function and identify firm 2's reaction function to firm 1's output.
c. Identify the equilibrium price and output of each firm.

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Definitions:

Behavior Feedback Phenomenon

The concept that an individual's behavior can influence and be influenced by the reactions it produces in the environment or context.

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