In the Challenge Solution, assume two firms face an inverse demand function of

p=abQ, and the marginal cost of each firm is m. A per-unit subsidy, s, given to both firms, reduces eachfirm's after-subsidy marginal cost to ms.

The best-response function for Firm 1 is

q1 = (am+s / 2b) 1/2 q2

and the best-response function for Firm 2 is

q2 = (am+s / 2b) 1/2 q1

Solving, each firm maximizes profits by producing such that

q = am+s / 3b.

A change in the subsidy changes each firm's profit by

i/s= _______________

for

I=1 and 2. (Properly format your expression using the tools in the palette. Hover over tools to see keyboard shortcuts. E.g., a superscript can be created with the ^ character.)