Question
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
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.)
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