The Inverse Demand for Tacos Is Given by P =

question 145

Essay

The inverse demand for tacos is given by P = 10 - 0.02Q, where P is the price per taco and Q is the total number of tacos brought to market. There are two taco shops in the market. Shop 1's cost function is given by C₁ = 0.01q₁², where q₁ is the number of tacos it brings to market. Shop 2's cost function is given by C₂ = 0.01q₂², where q₂ is the number of tacos it brings to market. Given that the two shops compete by setting output (Cournot), answer the following.
a. Identify shop 1's reaction function to firm 2's output.
b. Identify shop 2's reaction function to firm 1's output.
c. Identify the equilibrium output level of each shop and the equilibrium price for tacos.

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