Practice Problem 1: Two firms produce homogeneous goods with constant marginal costs c = 2. The market demand in each period is P(Q) =10 - Q where Q is output. (a) Compute Cournot (quantity competition) profits in this market (for which you need to compute output and prices, of course).(b) Compute the monopoly profit in this market. That is, what a firm with the same cost function would make if it were the only one in the market (and what a cartel of the two firms would decide to produce in this market).(c) Suppose that one firm produces half the output that you computed in (b). Compute the best response of the other firm, and explain why in one period an agreement between the two firms to produce each half the monopoly output (and so get half the monopoly profit) would not be honored..
Practice Problem 1: Two firms produce homogeneous goods with constant marginal costs c = 2. The market
demand in each period is P(Q) =10 - Q where Q is output.
(a) Compute Cournot (quantity competition) profits in this market (for which you need to
compute output and prices, of course).
(b) Compute the monopoly profit in this market. That is, what a firm with the same cost
function would make if it were the only one in the market (and what a cartel of the two
firms would decide to produce in this market).
(c) Suppose that one firm produces half the output that you computed in (b). Compute
the best response of the other firm, and explain why in one period an agreement
between the two firms to produce each half the monopoly output (and so get half the
monopoly profit) would not be honored..
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