2. Two firms sell identical products and compete as Cournot (quantity-setting) competitors in a

market with a demand of p(Q)=183 - Q. Initially, each firm has a constant marginal and

average cost of 3 per unit of output.

a) Compute each firm's best response function. Plot each of these functions on a graph with q1

on the horizontal axis and q2 on the vertical.

b) Compute the Cournot equilibrium quantities and profits.

c) Suppose that firm 1's cost rises to 4 per unit and firm 2's decreases to 2. On a graph,

show how this will change the best response functions. How will the equilibrium (quantities

and profits) change according to the changes you made on the graph? Compute the new

equilibrium

d) Suppose that the duopolists collude when costs are 3 per unit of output. Find their joint

profit (i.e. sum of firm's profits) maximizing price, output and profit; find each firm's output

and profit.