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Consider a market with two identical firms. The market demand is P = 26 – 2Q, where Q = qa + qb and the firms cost structure is such that MCa=MCb=ACa=ACb=2. a) Solve for the Cournot reaction functions of each firm. b) Solve for the Cournot-Nash equilibrium. Calculate the quantity of each firm, the market price, and the profit of each firm. c) Solve for the Stackelberg equilibrium assuming that firm a is the leader. Find: the quantities produced by each firm, the market price, and the profit of each firm. d) Solve for the output and price under perfect collusion (note: perfect collusion is a synonym for joint profit maximization or cartel). e) Now assume the market is perfectly competitive, what is the equilibrium market price and quantity? f) Use your answers above to rank from best to worst the above equilibria (Cournot, Stackelberg, perfect collusion, and perfect competition) according to: • Allocative efficiency • Industry profit (sum of firms’ profit)

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Business Economics, Economics

Category:- Business Economics
Reference No.:- M91846102

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