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An industry consists of two firms, each of which has a total cost function Ci = 10 + 2qi where qi is the firm i’s output. The market demand curve is given by P = 50 − 2Q where Q is total quantity q1+
An industry consists of two firms, each of which has a total cost function Ci = 10 + 2qiwhere qi is the firm i’s output. The market demand curve is given by P = 50 − 2Q where Q is total quantity q1+ q2.a) Assuming Cournot competition, set up the profit function and the first order condition for
profit maximization for firm 1. Explain briefly the profit function for firm 1 in this case. i.e. what is firm 1’s reasoning when setting up the profit function?
b) Derive the reaction function of each firm according to the Cournot model.
c) Solve for the Cournot equilibrium. Explain in words what the cournot equilibrium means. Find each firm's output, the market price, and each firm's profits.
