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Can I get some help on this question with answer and detailed explanation? I just have no idea how to approach and where to start...

Can I get some help on this question with answer and detailed explanation? I just have no idea how to approach and where to start...

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Nash Equilibrium Consider the following variation of the Cournot Duopoly model that we have seen in class. Two firms, the Morgenstern, inc. and the von Neumann, inc. are the only producers of game theory textbooks in the island of Tiscali. Letting Q = q1 + 92, the (inverse) demand function for these textbooks is P(Q) = 22 - 2Q. Morgenstern, inc. has a capacity constraint, which means that it cannot produce more than 2 books. von Neumann has no such constraint. The cost function of firm i, i =von Neumann, Morgenstern, is Ci(qi) = 2qi. To ease notation, you can indicate the Morgenstern firm as firm 1, and the von Neumann firm as firm 2. (a) Determine the best-reply function of either firm. (Remember that Morgen- stern cannot produce more than 2 books, so your formula should take that into account.) (b) Find a Nash Equilibrium of this game. (c) Now suppose that, prior to competing with von Neumann, Morgenstern can make an investment, paying a cost of 2, and get rid of its capacity constraint. (Assume that von Neumann observes Morgenstern's choice.) Determine the equilibrium of the game in which Morgenstern has made the investment, and calculate its profit in that equilibrium. Should Mor- genstern make the investment? Why/Why not

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