2. (40 points) Suppose there are two firms in a market who each simultaneously choose a

quantity. Firm 1's quantity is q

1

, and firm 2's quantity is q

2

. Therefore the market quantity is Q

= q

1

+ q

2

. 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:

MR

1

= 100 - 8q

1

- 4q

2

MR

2

= 100 - 4q

1

- 8q

2

.

A) (8 points) How much output will each firm produce in the Cournot equilibrium?

B) (8 points) What will be the market price of the good?

C) (8 points) What is the deadweight loss that results from this duopoly?

D) (8 points) How much profit does each firm make?

E) (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)