Let the market demand be = 25 0.5, where p is the market price and Q is the market output. There are two firms in the market (firm 1 has output 1and firm 2 has output 2) and their total cost function is 1 = 21 and 2 = 22, respectively. The two firms are Cournot competitors.

A). Define the Cournot reaction function. Find the Cournot reaction function for each firm.

B). Draw the reaction functions for both firms. (Be sure to label which is which and indicate the value of the reaction functions where they cross the axes).

C). Find the Cournot (Nash) equilibrium firm outputs and market price p.

Suppose the two firms decide to collude and form a cartel. How much will the

cartel produce?

D). The two firms agree to split the cartel output and profit equally. If firm 1 cheats

on the cartel agreement, how much will it produce?