Question

Question 2. [16 marks] A country has two oil producers, A and B, whose products are identical and they compete in quantities. Let P denote the oil price, $q_A$ the quantity sold by firm A, and $q_B$ the quantity sold by B. Each firm has a constant marginal cost of $MC_A = MC_B = $6 per pizza. The aggregate demand function for pizza is $Q = 60 - 2P$. a) [6 marks] Derive firm A's best-response function, $q_A = R_A(q_B)$. Also derive firm B's best- response function, $q_B = R_B(q_A)$. b) [7 marks] Solve for the Cournot equilibrium output levels $q_A$ and $q_B$. Sketch the two firms best-response functions (use horizontal axis for $q_A$ and vertical axis for $q_B$). c) [3 marks] Now suppose that firm A's marginal cost has decreased while B's cost does not change. Will firm A produce more or less? Will firm B produce more or less? Sketch this change in the graph in part b).

          Question 2. [16 marks]
A country has two oil producers, A and B, whose products are identical and they compete in
quantities. Let P denote the oil price, $q_A$ the quantity sold by firm A, and $q_B$ the quantity sold
by B. Each firm has a constant marginal cost of $MC_A = MC_B = $6 per pizza. The aggregate
demand function for pizza is $Q = 60 - 2P$.
a) [6 marks] Derive firm A's best-response function, $q_A = R_A(q_B)$. Also derive firm B's best-
response function, $q_B = R_B(q_A)$.
b) [7 marks] Solve for the Cournot equilibrium output levels $q_A$ and $q_B$. Sketch the two firms
best-response functions (use horizontal axis for $q_A$ and vertical axis for $q_B$).
c) [3 marks] Now suppose that firm A's marginal cost has decreased while B's cost does not
change. Will firm A produce more or less? Will firm B produce more or less? Sketch this
change in the graph in part b).

Question 2. [16 marks]
A country has two oil producers, A and B, whose products are identical and they compete in
quantities. Let P denote the oil price, qA the quantity sold by firm A, and qB the quantity sold
by B. Each firm has a constant marginal cost of MCA = MCB =6 per pizza. The aggregate
demand function for pizza is Q = 60 - 2P.
a) [6 marks] Derive firm A's best-response function, qA = RA(qB). Also derive firm B's best-
response function, qB = RB(qA).
b) [7 marks] Solve for the Cournot equilibrium output levels qA and qB. Sketch the two firms
best-response functions (use horizontal axis for qA and vertical axis for qB).
c) [3 marks] Now suppose that firm A's marginal cost has decreased while B's cost does not
change. Will firm A produce more or less? Will firm B produce more or less? Sketch this
change in the graph in part b).

Added by Gabrielle C.

Question

Please give Ace some feedback