9P 4. The market for nutmeg is controlled by two small island economies, Penang and Grenada. The market demand for bottled nutmeg is given by P=100-9p - 9G, where is the quantity Penang produces and qG is the quantity Grenada produces. Both Grenada and Penang produce nutmeg at a constant marginal and average cost of $20 per bottle. a. Verify that the reaction function for Grenada is given by qG=40-0.5qp. Then verify that the reaction function for Penang is given by qp = 40-0.5qG. b. Find the Cournot equilibrium quantity for each island. Then solve for the market price of nutmeg and for each firm's profit. c. Suppose that Grenada transforms the nature of com- petition to Stackelberg competition by announcing its
9P 4. The market for nutmeg is controlled by two small island economies, Penang and Grenada. The market demand for bottled nutmeg is given by P=100-9p - 9G, where is the quantity Penang produces and qG is the quantity Grenada produces. Both Grenada and Penang produce nutmeg at a constant marginal and average cost of $20 per bottle. a. Verify that the reaction function for Grenada is given by qG=40-0.5qp. Then verify that the reaction function for Penang is given by qp = 40-0.5qG. b. Find the Cournot equilibrium quantity for each island. Then solve for the market price of nutmeg and for each firm's profit. c. Suppose that Grenada transforms the nature of com- petition to Stackelberg competition by announcing its
Chapter19: Externalities And Public Goods
Section: Chapter Questions
Problem 19.3P
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