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4. Consider a Cournot duopoly model with inverse demand given by P(Q) = a - Q, in which firms (i = {1, 2}) compete on
4. Consider a Cournot duopoly model with inverse demand given by P(Q) = a - Q, in which firms (i = {1, 2}) compete on setting the quantities to produce (q1 and q2, Q = q1 + q2) of a homogeneous product. Both firms have total costs c;(qi) = cqi, but demand is uncertain: it is high (a = aw) with probability 0 and low (a = an) with probability 1 - 0. Furthermore, information is asymmetric: firm 1 knows whether demand is high or low, but firm 2 does not.All of this is common knowledge. The two firms simultaneously choose quantities. What are the strategy spaces for the two firms? Make assumptions concerning ay, an, 0, and c such that all equilibrium quantities are positive. What is the Bayesian Nash equilibrium of this game? (3 points)
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