Suppose two firms compete in quantities (Cournot). Market demand is given by P = 260 − 2Q, where Q = q1 + q2. Both firms have constant MC = AT C = 20. a. Solve for the Cournot equilibrium and find the Cournot equilibrium profits for each firm. b. Now suppose the two firms formed a cartel. What would be the profits for each firm then? c. If firm 2 sticks to the cartel agreement (quantity), then what is the best response for firm 1 (if firm 1 were to deviate)? Find the profits for firm 1 from deviating.
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Suppose two firms compete in quantities (Cournot). Market demand is given by P = 260 − 2Q, where Q = q1 + q2. Both firms have constant MC = AT C = 20.
a. Solve for the Cournot equilibrium and find the Cournot equilibrium profits for each firm.
b. Now suppose the two firms formed a cartel. What would be the profits for each firm then?
c. If firm 2 sticks to the cartel agreement (quantity), then what is the best response for firm 1 (if firm 1 were to deviate)? Find the profits for firm 1 from deviating.
d. How large must the probability-adjusted discount factor be in order for the cartel to be stable?
e. How would the answer to part d. change if the two firms were competing in prices (Bertrand)?
Please answer all steps, because no too much detailed answers required.
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