Question 2.

Company A and Company B are the only two firms that produce and sell a particular product. The

demand curve for their product is:

P = 400 - Q

where Q = QA + QB.

Company A and Company B have identical cost functions:

TCA = 40QA + Q2

TCB = 40QB + Q2

a) If these two firms collude and they want to maximize their combined profit, what is the

combined output and profit of the two firms? [5]

b) Now suppose that the managers at these two firms set their own output levels to

maximize profit, assuming the managers at the other firm hold constant their output, what

are the equilibrium price, output and profit levels of each firm? Hint: this is the Cournot

Solution. [5]

c) Suppose the manager at Company A decides to act first and set its output before

Company B assuming that Company B will make its output decision based on its actions.

What are the equilibrium price, output and profit level of each firm? Hint: this is the

Stackelberg Solution. [5]