Consider a duopoly market with 2 firms. Aggregate demand in this market is given by
Q = 500 – P,
where P is the price on the market. Q is total market output, i.e., Q = QA + QB, where QA is the output by Firm A and QB is the output by Firm B. For both firms, marginal cost is given by MCi = 20, i=A,B.
Assume the firms compete a la Cournot.
- Find the inverse demand in this market.
Note that marginal revenue for both firms is given by
MRA=500-2QA-QB,
MRB=500-QA-2QB.
2.Describe what a best-response curve is and how to find it.
3. Derive the best-response function for each firm.
4. What are the equilibrium quantities?
5. What is the total quantity supplied on this market?
6. What is the equilibrium price in this market?
