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Could someone please help me with a step by step instruction? I don't even know where to start... What is a maximization problem? Exercise 3.

Could someone please help me with a step by step instruction? I don't even know where to start... What is a maximization problem?

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Exercise 3. Cournot Model with Asymmetric Costs Consider the following version of the Cournot Model with asymmetric costs. Two players, Firm 1 and Firm 2, simultaneously choose quantities q1 and q2. The inverse demand function is P(Q) = 100 - Q, where Q = q1 + 92. The marginal costs are c1 = 10 for Firm 1, and c2 = 25 for Firm 2. a. Write down the profit maximization problem of Firm 1 and find their best response function. b. Write down Firm 2's profit maximization problem and find their best response function. c. Using the best response functions from a. and b., find the competitive (Nash) equilibrium. Find the market price and profit for each firm. d. Assume that the two firms make an agreement, that they both produce 5 units less than in equilibrium in part c. Calculate the new market price and profit for each firm. e. Show that even though the profits are higher in part d., this is not a Nash Equilibrium (i.e. show a unilateral profitable deviation)

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