Assume that two firms are in a Cournot oligopoly market. Marketdemand is P=120 - Q where Q isthe aggregate output in the marketand P is the price. Firm 1 has the cost functionTC(Q1)=30 + 10Q1 and Firm 2 has the costfunction TC(Q2)=15 + 20Q2.
a) Write down the
Profit function of Firm 1:
Profit function of Firm 2:
b) Using the profit functions in part (a), obtain the reactionfunction of Firm 1 to Firm 2.
c) Using the profit functions in part (a), obtain the reactionfunction of Firm 2 to Firm 1.
d) Using the reaction functions from parts (b) and (c), obtainthe profit maximizing output level of Firm 1.
e) Using the result from part (d), obtain the profit maximizingoutput level of Firm 2.
f) Now assume that the firms engage in a sequential quantitycompetition with Firm 1 as the first mover. Construct the profitfunction of Firm 1.
g) Using the profit function from part (f), obtain the profitmaximizing output level of Firm 1.
h) Obtain the profit maximizing output level of Firm 2.
