Please include step by step working and derivation of any methods used in the following questions: 1. a) Consider a homogeneous goods industry where two firms operate and the linear demand is given by p(y1 + y2) = a - b(y1 + y2 ), where p is the market price, and y1 (y2) is the output produced by firm 1 (2). There are no costs for firm 1 or firm 2. Derive the best responses (reaction curve) for firm 1 and firm 2. Explain the term best response (reaction curve). Illustrate the best responses in a diagram. b) For the case in (a) determine the Cournot equilibrium (Nash equilibrium in quantities) when firm 1 and firm 2 compete simultaneously in quantities. How large are firm 1’s and firm 2’s profits? What is the industry output?

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
icon
Related questions
Question

Please include step by step working and derivation of any methods used in the following questions: 

1. a) Consider a homogeneous goods industry where two firms operate and the linear demand is given by

p(y1 + y2) = a - b(y1 +  y2 ), where p is the market price, and y1 (y2) is the output produced by firm 1 (2). There are no costs for firm 1 or firm 2. Derive the best responses (reaction curve) for firm 1 and firm 2. Explain the term best response (reaction curve). Illustrate the best responses in a diagram.

 

b) For the case in (a) determine the Cournot equilibrium (Nash equilibrium in quantities) when firm 1 and firm 2 compete simultaneously in quantities. How large are firm 1’s and firm 2’s profits? What is the industry output?

 

c) Suppose the inverse demand curve in a market is D(p) =a-bp, where D(p) is the quantity demanded and p is the market price. Firm 1 is the leader and has a cost function c1(y1)=cy1 while firm 2 is the follower with a cost function c2(y2 )=.  Firm 1 sets its price to maximise its profit. Firm 1 correctly forecasts that the follower takes the price leader’s chosen price as given (price taker) and chooses output so as to maximise its own profit. Write down the profit function of the follower. Calculate the profit maximising quantity that the follower selects given the leader’s chosen price p (i.e., calculate the follower’s supply curve S(p)). Interpret the solution to the profit maximising problem.

 

d) The leader is facing the residual demand curve R(p)=D(p)-S(p) with D(p) and S(p) as defined in (c) above.Calculate the leader’s residual demand curve using the result in (c). Solve for p as a function of the leader’s output y1, i.e. the inverse demand function facing the leader. Write down the profit function of the leader and find the profit-maximising level of output.

Expert Solution
steps

Step by step

Solved in 6 steps with 1 images

Blurred answer
Knowledge Booster
Profits
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:
9780190931919
Author:
NEWNAN
Publisher:
Oxford University Press
Principles of Economics (12th Edition)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education