Question
Consider a market for an identical product that has (inverse) demand given by P = 70 0.25Q where Q is the total output in the
Consider a market for an identical product that has (inverse) demand given by P = 70 0.25Q where Q is the total output in the market. In this market, firm 1 chooses its output q1 first and then firm 2, after observing q1, chooses its output level q2. Firm 1 has a constant marginal cost c1 = 10 per unit and firm 2 has a constant marginal cost c2 = 15 per unit.
What is the subgame perfect equilibrium of this game? How much output is each firm producing in equilibrium? How much profits are each firm making in equilibrium? (5 pts)
Now suppose that we reverse the order of the game such that firm 2 now moves first and firm 1 moves second after observing firm 2's output. What is the subgame perfect equilibrium of this game? How much output is each firm producing in equilibrium? How much profits are each firm making in equilibrium? (5 pts)
Now suppose that firm 2's marginal cost was reduced to c2 = 10 per unit but firm 2 is back to being the second mover again (firm 1 moves first and firm 2 moves second after observing firm 1's output). What is the subgame perfect equilibrium of this game? How much output is each firm producing in equilibrium? How much profits are each firm making in equilibrium? (5 pts)
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