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Question 3 [word limit: 750] Consider a duopolistic market served by two firms, firm 1 and firm 2. The two firms produce, respectively, quantities q1
Question 3 [word limit: 750] Consider a duopolistic market served by two firms, firm 1 and firm 2. The two firms produce, respectively, quantities q1 and q2 and compete to maximise own profits. Suppose that market demand is given by p = 1 - Q where Q = q1 + 92. Suppose that the two firms incur production costs equal to C1(q1) = C191 C2 (92) = C292 and 1 > c1 > C2 > 0.b. Consider now the case where c1 = C2 = c and 1 > c > 0. Suppose that firm 2 has the ability to move first and choose q2 before firm 1 chooses q1. Derive and describe the Nash equilibrium with sequential moves. Would consumer surplus increase, if the two firms moved simultaneously? [25 marks]
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