Problem Set 3 - Lecture 9, 10, 11
Lecture 9: Oligopoly
Consider the melon market example used in the class, assume the marginal cost of Firm 2 is $0.31, the marginal cost of Firm 1 is still $0.28.
a. Under Cournot quantity competition, if Firm 2 believes that Firm 1 will produce q1, derive the profit function and the best-response function for Firm 2.
b. Consider Stackelberg leader-follower competition. If Firm 1 is the leader and produces q1, derive the profit function of Firm 2 and the best-response function q2.
c. Are the results in a. and b. the same? Why?
d. Under Bertrand price competition, if Firm 1 sets the price P1 = 0.30, then how should Firm 2 respond, why?
e. Under Cournot quantity competition, compute each firm's optimal output.
f. Under Stackelberg leader-follower competition, compute the leader's optimal output.