04 Jun Question 2. (40 points) Suppose there are two firms in a market who each simultaneously choose a quantity. Firm 1’s quantity is q1, and firm 2’
Question
2. (40 points) Suppose there are two firms in a market who each simultaneously choose a quantity. Firm 1’s quantity is q1, and firm 2’s quantity is q2. Therefore the market quantity is Q = q1 + q2. The market demand curve is given by P = 100 – 4Q. Also, each firm has constant marginal cost equal to 28. There are no fixed costs.
The marginal revenue of the two firms are given by:
· MR1 = 100 – 8q1 – 4q2
· MR2 = 100 – 4q1 – 8q2.
A) (8 points) What is the deadweight loss that results from this duopoly?
B) (8 points) How much profit does each firm make?
C) (8 points) Suppose Firm 2 produced 10 units of output. How much output should Firm 1 produce in order to maximize profit? (Hint: Use Firm 1’s Reaction Function)
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