15.3 Let ci be the constant marginal and average cost for firm i (so that firms may have different marginal costs). Suppose demand is given by P ¼ 1 $ Q.

a. Calculate the Nash equilibrium quantities assuming there are two firms in a Cournot market. Also compute market output, market price, firm profits, industry profits, consumer surplus, and total welfare.

b. Represent the Nash equilibrium on a best-response function diagram. Show how a reduction in firm 1’s cost would change the equilibrium. Draw a representative isoprofit for firm 1.