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Using the Conjectural Variations model, answer the following:

(You must show the step-by-step derivation of all results to get full credit.)

Consider a linear demand curve with quantity intercept a and price intercept b (p = b - b/a q) and 2 firms, each producing a part of the total output (q = q1  + q2) with a marginal cost of c. Firm 1 makes a conjecture (guess) about what firm 2 will do in response to any move firm 1 makes, and decides its move accordingly: q1  = q1(q2).

a)  Calculate the two firm's reaction functions with conjectural variations [q1(q2) and q2(q1)].

b)  If we assume only that firms behave rationally, what would be the equilibrium set of conjectural variations (dq2/dq1 = dq1/dq2 =?).  Is this a Nash Equilibrium? Explain.

c)  What do the values of dq2/dq1 and dq1/dq2 found in (a) mean?  Which specific model makes this assumption?  If firms made this conjecture, what is the total market output?

d)  What type of a market structure does this imply?  Explain (show) clearly. 

 

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M91582768
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