2. Consider an industry with two firms producing an identical product. Let 9₁ be the output for firm 1, q2 for firm 2, and Q = 9₁ +92. In each period, market demand is given by P 40-Q and the firms compete à la Cournot. There is a sequence of infinitely many periods. Both firms have cost function of c(q) = 5q, and discount future profits with discount factor ß € [0, 1). (1) If both firms form a cartel, what are the quantity and profit of each firm? (2) Suppose that the collusive firms adopt a trigger strategy. That is, each firm competes in Cournot fashion if any deviation from collusive q has been observed. If 3 = 0, what is firm 1's best response to firm 2 playing the cartel quantity? (3) Explain how your answer to part (2) changes as 3 increases. Find the threshold of B, below which the cartel is not sustainable.

2. Consider an industry with two firms producing an identical product. Let 9₁ be the output for firm 1, q2 for firm 2, and Q = 9₁ +92. In each period, market demand is given by P 40-Q and the firms compete à la Cournot. There is a sequence of infinitely many periods. Both firms have cost function of c(q) = 5q, and discount future profits with discount factor ß € [0, 1). (1) If both firms form a cartel, what are the quantity and profit of each firm? (2) Suppose that the collusive firms adopt a trigger strategy. That is, each firm competes in Cournot fashion if any deviation from collusive q has been observed. If 3 = 0, what is firm 1's best response to firm 2 playing the cartel quantity? (3) Explain how your answer to part (2) changes as 3 increases. Find the threshold of B, below which the cartel is not sustainable.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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**Practice**
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